A widget manufacturer currently produces 20,000 units a year by using its old widget machine at a price of RM6.50 per lid. The plant manager believes that it would be cheaper to produce this output if they upgrade their factory machine to a new machine. The old machine annual depreciation is at RM2,000 and its estimated life is 50 years and with an estimated zero sales price. Current book value is RM5,000 and current selling price is at RM7,000.

Meanwhile, the new machine has been identified at a cost of RM25,000 and being depreciated over a 5-year period. This new machine is expected to increase the output to 28,000 units a year. This investment could be written off for tax purposes using the simplified straight-line method and it has no economic value at the end of its 5-year life. The plant manager estimates that with the new machines, operation would save the production costs of RM600 per annum from its old machines production cost of RM10,000. The company pay its current and expected tax rate of 24 percent over the next five years and its after tax required rate of return is at 15 percent.

1. Prepare the cashflow and calculate the Net Present Value (NPV) for the old machine.

(6 marks)

2. Prepare the cashflow and calculate the Net Present Value (NPV) for the new machine.

(12 marks)

3. Based on your calculation above, suggest to the company whether they should proceed with the decision to buy the new machine.

handwritten not allowed