Question 1 Chapter 21: Capital Investment for Manufacturing A factory machine was purchased for R1 275 000 four years ago. Its present value is R867 000. The anticipated remaining life of this machine is estimated as six years, where the resale or salvage values is estimated as R255 000. This machine produce 3 parts per hour of a certain product. Since monthly demand of this part is 1500 parts, 8 hours per day and 20 hours days per month are worked and the machine requires an hourly operating cost of R 765, together with a direct labour cost of R382,5 per hour. A new high efficiency automatic machine is proposed, it produces 5 parts per hour with an hourly operating cost of R540, hence, it is only necessary to operate this machine for 80 hours per month to satisfy the monthly demand. Owing to the automatic capability of this machine we can employ an unskilled worker for R306 per hour direct labour cost. The purchase cost is R 3 060 000 and the salvage cost is estimated as R510 000, with an estimated life of 10 years. A piece of raw material costs R540. Assume that depreciation is calculated on a straight line basis and the rate of interest is 7% of cost of capital.

(a) Use excel to make an annual cost comparison for the existing general purpose machine and the new automatic machine proposed. (b) Should the existing machine be replaced by the new machine? (c) Give a reason for your answer in part C above.