An injection molding machine that was purchased by KHI Corporation $2$ years ago is currently being utilized by the company. The depreciation of this machine is calculated using the straight$-$line method, with a salvage value of RM$500,000$ and a remaining lifespan of $6$ years.It has a book value that is worth RM$2,600,000$ at the moment, and it is currently available for

sale at a price of RM$3,000,000.$

KHI has proposed a replacement machine which has a cost of RM$8,000,000,$ an anticipated lifespan of $6$ years, and an estimated salvage value of RM$800,000.$ This machine falls into the MACRS $5-$year class, so the applicable depreciation rates are $20\%,32\%,19\%,12\%,11\%,$ and $6\%.$ The introduction of the replacement machine would enable an increase in output, resulting in a yearly sales growth of RM$1,000,000.$ However, the significantly improved efficiency of the new machine would lead to a reduction in operating expenses by RM$1,500,000$ per year. The implementation of the new machine would necessitate an RM$2,000,000$ increase in inventories, while concurrently resulting in an RM$500,000$ increase in accounts payable. KIH's marginal tax rate is $40\%,$ and its WACC is $15\%.$

REQUIRED:

a$.$ Should KIH proceed with the implementation of the replacement strategy?

b$.$ Using the Payback Period Method and Discounted Payback Period Method, calculate

the number of years needed to recover the initial cash outlay.

c$.$ Explain the effect of inflation on the cash flows.