return is $25$ percent. Evaluate the project using NPVV$.$

Question $11$

Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is GH$2\mathrm{.}2$ million. Its current book value is $GH1\mathrm{.}4$ million. If not sold, the old machine will require maintenance costs of $GH845,000$ at the end of the year for the next five years. Depreciation on the old machine is $GH280,000$ per year. At the end of five years, it will have a salvage value of $GH120,000$ and a book value of GH$0.$ A replacement machine costs GH $4\mathrm{.}3$ million now and requires maintenance costs of GH$330,000$ at the end of each year during its

Page $5$ of $33$

economic life of five years. At the end of the five years, the new machine will have a salvage value of GH$800,000.$ It will be fully depreciated by the straight$-$line method. In five years a replacement machine will cost $GH!in3,200,000.$ Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is $40$ percent and the appropriate discount rate is $8$ percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Pilot Plus Pens replace the old machine now or at the end of five years?