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Kian Hoo Packaging Company ( KHP ) uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a
Kian Hoo Packaging Company KHP uses an injection molding machine that was purchased years ago. This machine is being depreciated on a straightline basis towards zero salvage value and it has years of remaining life. The machine current book value is $ and it can be sold today for $ 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 $ Shipping & freight insurance are estimated at $ and installation costs are estimated at $ respectively. This proposed new machine has an estimated useful life of years with an estimated resale price of $ at the end of the project.
This proposed new machine will also be depreciated on a straightline basis towards zero salvage value.
The proposed new machine would increase production, so sales would rise by $ per year. Even so the new machine's greater efficiency would cause operating expenses to decline by $ per year. The new machine would require an increase in operating working capital as follows:
Accounts payable
$
Accounts receivables
$
Accruals
$
Inventories
$
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 and will use its weighted average cost of capital estimates of to evaluate this proposal. Should KHP make the replacement? Use NPV and IRR to make your decision
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