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New - worn Pte Ltd , a textile recycling firm, has been in business for 2 0 years. It is contemplating purchasing new machines to
Newworn Pte Ltd a textile recycling firm, has been in business for years. It
is contemplating purchasing new machines to replace existing ones. In order to
determine the feasibility of incorporating the new machines into its current
production process, Newworn had previously paid $ to commission a study
for this exercise.
The new machines are expected to cost $ with an additional $ for
installation expense. The aftertax proceeds from disposing off existing
machines is expected to amount to $ Current assets will increase by
$ and current liabilities will increase by $
The revenues and expenses excluding depreciation and interest associated with
the existing machines for the next four years are given in the table below.
The company has a cost of capital of per annum.
a Determine the initial investment associated with the purchase of the new
machines.
b It is projected that the new machines will increase revenue by and
increases expenses by respectively. Calculate the following:
i Operating cash inflows for the existing machines.
ii Operating cash inflows for the new machines.
iii. Incremental cash flows for this project.
c Calculate the Net Present Value NPV for this project.
d Should Newworn purchase the new machines, or continue with the
existing machines? Explain.
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