Question 1. Petaling plc can purchase a new machine that will reduce the manufacturing cost of the company's most popular product. You have been asked to evaluate the acquisition of the new equipment. The old machine cost 70 000 at the beginning of 2005 and has been depreciated by 7 000 each year. At the end of 2007, it was shown in the company's Balance Sheet at 49 000 but it is expected that it could only be sold for 19 000. However, the new machine will be bought toward the end of 2007 and will cost 60 000. This machine will be operational early in 2008 and will be depreciated, using the straight-line method, over a period of 10 years. The new machine will reduce the cost of manufacture by 6 per unit. It expected that 8 000 units will be sold in 2008 and the sales will increase by ten per cent each year for the following two years. At the end of 2010, the demand for this product will cease and the machine will be sold for its book value. The present operations use working capital of 10 000 but the working capital will increase at the beginning of each year by 10%. Tax is payable at 40 per cent and is always paid one year in arrears. The company has other very profitable products. Required: A) What will be the effect on the company's profit if the new machine is acquired? B) Should the company invest in the new machine if the discount rate that is used to evaluate projects of this kind is 12% C) Discuss the problems that arise if the Net Present Value is not used to evaluate projects but the Payback method or the Internal Rate of Return is used to evaluate the project. The present value factors at 12% are:- Year 1 Year 2 Year 3 Year 4 0.8629 0.7972 0.7118 0.6355