Financial Analysis Problem

Background: Aurora Companv is considering the purchase of a new machine. The invoice price of the new machine is RM 140.000. freight charges are estimated to he HM 4.000. and installation costs are expected to he HM 6.000. Salvage value of the new machine is expected to be zero after a useful life of 5 vears. Existing equipment could be retained and used for an additional 5 years if the new machine is not purchased. At end of the additional 5 vears. the salvage value of the existing equipment would be zero. If the new machine is purchased now. the existing equipment would have to be scrapped at its current book value. Aurora's accountant has accumulated the following data regarding annual sales and expenses with and without the new machine: 1. Without the new machine. Aurora can sell 12.000 units of product annuallv at a per unit selling price of RM 100. If the new machine is purchased. the number of units produced and sold would increase by 10%. and the selling price would remain the same. 2. The new machine is faster than the existing equipment. and it is more efficient in its usage of materials. 1I-'iiith the existing equipment the gross prot rate will be 25% of sales. whereas the rate will he 30% with the new machine. 3. Annual selling expenses are RM 100.000 with the existing equipment. Because the new machine would produce a greater number of units to he sold. annual selling expenses are expected to increase by 10%. if it is purchased. 4. Annual administrative expenses are expected to he RM 100.000 with the existing equipmentr and RM 113,000 with the new machine. 5. The current book value of the existing equipment is RM 30.000. Aurora uses straight- line depreciation method. 5. Aurora has two options for funding the purchase price of the new machine: a. 100% internal funding; or h. 50% internal funding and 50% bank loan at 5% APR for5 years with the principal paid at the end ofthe loan period. T. The income tax rate Is 13% applied on the Prot Before Taxes {PET}. Tasks: In groups of up to 3 people. camp out the following analvsis: i. Prepare analysis {of your choice] for the next 5 veers; and ii. Based on your analysis determine whether Aurora should keep the existing equipment or buy the new machine and what funding would be the most appropriate if buying the new machine