At the beginning of the year N$,$ the company ROANNE is largely profitable and plans to replace a machine, which has been in service since the beginning of the year N$-3.$ This machine had been acquired at $400,000$ and is depreciable linearly over $8$ years. The current machine can still be used for $5$ years for a maintenance fee of $15,000$ per year.

The purchase price of the new machine is $600,000.$ The new machine would be depreciated over $5$ years, also according to the linear method. The maintenance costs amount to $9,000$ per year, over a period of use of $5$ years. It is estimated that at the end of $5$ years the new machine can be resold for $4,500($price net of tax on capital gains on sale$).$

The new machine, more efficient and more economical, would allow:

$$ To increase production and sales, currently $10,000$ units, by $50\%.$ The selling price is $50$ per unit;

$$ To reduce fixed unit costs from $12$ to $9$;

$$ To reduce the Working Capital Requirement of $5,000$ in the first year of operation.

The variable cost marginal rate would remain at the current level of $40\%$ of sales$/$turnover$.$

The seller of the new machine offers to repurchase the old machine now for $260,000($price net of tax on the capital gains of sale$).$ If we continue using the old machine, it can be resold after $5$ years for $3,000($price net of tax on the capital gains on disposal$).$

Note: The transfer prices of Fixed Assets are the sale of the asset, net of capital gains tax. The corporate tax rate is $33\mathrm{.}33\%.$ The cost of capital is $8\%.$

The basis for calculating depreciation is the acquisition value.

Assignment:

Using the NPV and IRR methods, conclude on the proposed project:

$$ Determine the initial investment amount in the new machine;

$$ You calculate the cash$-$flows for the old machine, for the years N$,...,$ N$+4$;

$$ You calculate the cash$-$flows for the new machine, for the same $5$ years;

$$ Take the difference, the incremental cash$-$flows which result from the investment in the new machine;

$$ Discount the $5$ incremental cash$-$flows at the cost of capital and compare these with the investment in the new machine. Now, compute the NPV and IRR of the project.