A company wants to invest in a new machine at a cost of R3.5 million in order to manufacture a new product line. The expected residual value of the machine is R250 000 in 4 years time. It is expected that the new product line will generate savings of R800 000 in the first year, which will then increase by 15% p.a. (on a yearly basis) for the next 3 years. The investment in working capital will amount to 5% of the cost of the machine and is recoverable at the end of year 4. Depreciation is calculated on a straightline basis (do not include residual value in depreciation calculation). The investment in the new machine is a replacement decision. The following information relates to the machine being replaced: Purchased three years ago at a cost of R2 million. Current market value is R900 000. Residual value at the end of its lifetime (in two (2) years) will be R80 000. Depreciation per year is equal to R400 000 calculated on a straight-line basis. Any scrapping allowance/recoupment will occur one year after the sale. The cost of capital is 18% and the company tax rate is 28%