Annacott Pty Ltd is considering purchasing a new machine to alleviate a bottleneck in its production facilities. At present, it uses an old machine that can process 8,000 units of Product X per week. The company could replace it with machine YZ, which is product-specific and is able to produce 20,000 units per week. Machine YZ costs $500,000. Removing the old machine and preparing the area for machine YZ would cost $20,000.

The company expects demand for Product X to be 12,000 units per week for another three years. After this, in the fourth year, the new machine would be sold for $50,000. This sale is not expected to take place until later in the fourth year. The existing machine would have no scrap value. Each Product X sells for $7.00 and has a contribution to sales ratio of 0.2. The company works for 48 weeks in the year. Normally, the company expects a payback within two years and its after-tax cost of capital is 10% per annum.

Moreover, the company pays corporation tax at 30% and receives writing-down allowances of 25%, reducing balance on the investment and any costs incurred in removing the old machine and installing the new machine. Corporation tax is payable one year in arrears.

1. Calculate the net present value for the machine. (10 marks)
2. Recommend, with reasons, whether the machine should be purchased.(10 marks)