Company X is tries to decide if the manually operated equipment should be replaced by full automatic equipment. You have the following information:

Current situation

Two workers with the salary 20 000 USD per year per one worker.

Maintenance cost is 10 000 USD per year

Waste (e.g. defective work) is 12 000USD per year

Economic lifetime of the machinery 10 years (investment was made 5 years ago)

Salvage value is 0. (e.g. book value in 5 years, also market value is zero)

Linear depreciation method (8 000 per year)

Current market value if sold 24 000USD

Tax rate 34% on EBT

New project

Investment (new machinery) 120 000USD

Two workers salary is saved

Maintenance cost is 15 000USD

Waste: 6 000USD per year

Economic lifetime 5 years

Linear depreciation method

Book value = market value in five years. (both book and market values are 0)

Required rate of return is 12%

If using excel, show formulas.

a) Prepare cash flow budget and evaluate the project based on net present value

b).Should the company replace the existing machinery?