CASH FLOW ESTIMATION - Replacement Projects exercises: 1. Kian Hoo Packaging Company (KHP) uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis (towards zero salvage value), and it has 5 years of remaining life. The machine current book value is $40,000, and it can be sold today for $35,000. If the existing machine is not replaced, it would be worthless at the end of its useful life. KHP is considering a new machine to replace the existing one that has a cost of $78,000. Shipping & freight insurance are estimated at $8,000 and installation costs are estimated at $4,000 respectively. This proposed new machine has an estimated useful life of 5 years with an estimated resale price of $8,000 at the end of the project. This proposed new machine will also be depreciated on a straight-line basis towards zero salvage value. The proposed new machine would increase production, so sales would rise by $20,000 per year. Even so, the new machine's greater efficiency would cause operating expenses to decline by $10,000 per year. The new machine would require an increase in operating working capital as follows: Accounts payable $15,000 Accounts receivables $10,000 Accruals S 5,000 Inventories S25,000 This investment in working is expected to be recovered at the end of the project life. Assume inflation is zero and changes in revenues and operating expenses are expected to be constant over the project's life. KHP tax rate is 40% and will use its weighted average cost of capital estimates of 16% to evaluate this proposal. Should KHP make the replacement? (Use NPV and IRR to make your decision)