Question 2: (20 marks)

Four years ago, the Westin Company purchased a semi-automated machine with an installed cost of $80,000. It has an estimated life of 8 years from the time of purchase and is being depreciated using a straight-line method towards zero salvage value. This existing machine can be sold today for $10,000. A new, fully automated machine can be purchased for $100,000 and another $20,000 is required to have the machine installed and commissioned. It has a 4-year life and is expected to reduce operating expenses by $60,000 each year. Sales are not expected to change. The proposed new machine after 4 years, is expected to have an estimated salvage value of $20,000. The straight-line depreciation method is also being used for the proposed new machine. If the proposed new machine is accepted, it is expected that net operating working capital would increase by $10,000. This investment would be fully recovered at the end of the projects life. The company cost of capital is 15% and its tax rate is 40%.

As the newly appointed Financial Executive of this company, you are required to evaluate and make recommendations whether to proceed with the replacement. (Hint: Use the NPV and IRR criterion)

[Total: 20 marks] N.B: Round to the nearest whole number for all calculations. For rate of return, use 2- decimal places.