Question
Protea Limited is considering replacing an existing factory machine with a newer, more efficient piece of equipment. The existing machine is three years old and
Protea Limited is considering replacing an existing factory machine with a newer, more efficient piece of equipment. The existing machine is three years old and cost R32 000. The current machine is being depreciated over 8 years. It has a remaining useful life of five years. The new 'Machine A' costs R40 000 plus R8 000 to installation cost, has a five-year useful life, and will be depreciated over the five years using the straight-line method. The replacement would require R4 000 in additional working capital. The projected net operating profit after taxes (NPOAT) are provided in the following table: Year Existing machine Machine A 1 R7 200 R8 208 2 R7 200 R8 208 3 R7 200 R8 208 4 R7 200 R8 208 5 R7 200 R8 208 The existing machine can be sold today for R25 000. The existing machine has no salvage value five year from now. After five years, 'Machine A' could be sold for R12 000, all before taxes. The company tax rate is 28%. Ignore capital gains tax. If the existing machine is replaced with Machine A, the initial investment is?
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