Mbilwi Limited is considering replacing an existing factory machine with one of two newer types of machines (referred to as machine M and machine N). The existing machine is oneyear old and cost R60 000 and is being depreciated over 6 years. It has a remaining useful life of five years. The existing machine can be sold today for R25 000 or for R5 000 at the end of its useful life. New machine N Machine N costs R66 000 to purchase, R4 000 to install, has a five-year useful life, and will also be depreciated over its lifespan. Using this machine rather than the existing one will mean management will have to buy R8 000 in additional working capital. After five years, machine N could be sold for R8 000, before taxes. New machine M The new machine M costs R50 000 plus R5 000 installation cost, has a five-year useful life, and will be depreciated over the five years using the straight-line method. Replacing existing machinery with machine M will require R6 000 in additional working capital. After five years, machine M could be sold for R5 000, before taxes. The company tax rate is 29%. Ignore capital gains tax. The companys weighted average cost of capital is 10%. You can assume that depreciation is equal to the wear and tear deduction allowed by SARS. The projected cash flows before depreciation and taxes for each alternative machine are provided in the following table: Requirement: Determine whether to keep the existing machine, or replace it with either machine N or machine M using the NPV capital budgeting tool.

SARS allows 20% wear and tear.