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Khong Guan Biscuit Company (KGB) is considering the purchase of a new automated machine to replace an existing one. The existing machine can be sold
Khong Guan Biscuit Company (KGB) is considering the purchase of a new automated machine to replace an existing one. The existing machine can be sold today for $4,000.00. This existing oven has another 4 years of its useful, with current book value of $4,000.00. KGB uses straight line method of depreciation towards a zero salvage value for this existing oven. The proposed new machine has a 4-year project life, with an installed cost of $23,000.00. This proposed new machine will also be depreciated using straight line method with an estimated salvage value of $3,000.00 at the end of its 4-year useful life. The proposed new machine will increase sales by $15,000.00. Operating costs will increase by $5,000.00. Sales and operating expenses are expected to be constant during the life of the project. Investment in operating working capital is expected to increase by $2,000.00 which will be fully recovered at the end of the project's life. KGB is in the 40% tax bracket and its WACC is 15%. Should KGB proceed with the replacement? [Hint: Use the NPV and IRR criteria)
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