PGR Berhad, a manufacturer of plastic products, is considering replacing a 5 year old manual moulding machine with a new automated machine. The replacement can save production costs by RM51,000 per year. The present and the expected situation resulting from the replacement are given below:

Present MachineNew Machine

Total expected useful life10 years5 years

Cost of machineRM100,000RM145,000

Expected resale value

5 years from nowRM0RM37,500

Resale value nowRM12,500-

Depreciation charge per year

(straight - line method)RM10,000RM29,000

Investment tax credit-10% on cost

The company's tax rate is 40% and tax is paid in the year it is incurred. The capital allowance is equal to the depreciation charged. Investment tax credit is claimed in the year of investment.

a.Calculate the cash flows if the machine is replaced.

b.If the rate of return is 12%, calculate the following:

i.Payback period.

ii.Net present value.

iii.Profitability index.

iv.Internal rate of return.