Kaufold Ltd, a large manufacturer of aircraft components, has a capital budget of R2 000 000 and is evaluating the replacement of its existing machine with the more sophisticated model. The CFO determined the initial investment required and the terminal cash flow associated with the replacement to be R1 666 000 and R254 000 respectively. Both the usable life of the proposed and the remaining life of the current machine are 5 years.

Expected cash inflows relating to the investments are as follow:

Year	Proposed machine	Current machine
1	986 000	895 000
2	986 000	881 000
3	986 000	819 000
4	986 000	805 000
5	986 000	791 000

Kaufold Ltds WACC is 15% and it is taxed at 29%.

REQUIRED

1.1 Calculate the incremental cash flows relating to the replacement decision. (6 marks)

1.2 Calculate the NPV and IRR relating to the two investments (using incremental cash flows calculated above). (2 marks)

1.3 Based on the NPV and IRR calculated above, would you advise Kaufold Ltd to invest their funds in the replacement? Provide a reason for your answer. (2 marks)