2. c) The Red Toy Company currently uses an injection moulding machine that was purchased 2 years ago at cost RM28,000. This machine is being depreciated on simplified straight line method and has 6 years of remaining life. This machine can be sold for RM20,000 at this time. Red Toy is offered a replacement machine which has a cost of RM25,000. It would incur another RM5,000 to modify the machine for special use by the firm. The machine has estimated useful life of 6 years and estimated salvage value of RM2,000. The replacement machine would permit an output expansion and greater efficiency, so sales would rise by RM5,000 per year and operating expenses are expected to decline by RM1,200 per year. The new machine would require that inventories to be increased by RM20,000, but account payable would simultaneously increase by RM5,000. The tax rate is 28 percent and the cost of capital is 15 percent.

i. What is the projects initial outlay? (5 marks)

2. Calculate annual cash flows over the the projects life.

3. Calculate the terminal cash flow.

(4 marks) (3 marks)

iv. Determine whether Red Toy should replace the old machine? Explain your answer.

(3 marks)