Question 2 The supervisor of the machining department of GMW Ltd is considering the replacement of some machinery. The current market value of this machinery is 800. One possible alternative is to invest in new machinery, which has a cost of 39,000. This new machinery would produce estimated annual operating cash savings of 10,000. The estimated useful life of the new machinery is four years. The department uses straight-line depreciation. The new machinery would have an estimated residual value of 2,000 after four years. The old machinery would have a zero residual value at the end of the four years. The investment in the new machinery would also require an additional investment in working capital of 3,000, which would be recovered after four years. If the machining department accepts this investment proposal, disposal of the old machinery and investment in the new equipment would take place on 31 December 2020. The cash flows from the investment would occur during the calendar years 2021 through 2024. GMW Ltd has a required rate of return of 10 percent. Required: a) Prepare a schedule of the cash flows related to the proposal and calculate the net present value of the proposal. You can use the tables provided in the appendix to identify the discount factors. Round your answers to three decimals, if necessary. Based on the net present value criterion, should the machining department buy the new machinery? (40 marks) b) The supervisor thinks that the higher quality and faster production resulting from the new machinery will generate annual cash savings of 15,000, higher than initially estimated. Calculate the net present value of the proposal under this new assumption. Round your answers to three decimals, if necessary. Would the decision of the machining department change compared with requirement a)? (20 marks) c) Management is uncertain if the estimated annual cash savings will occur. Calculate the minimum annual amount of cash savings that will cause the machining department to invest in the new machinery based on the net present value criterion. Show all your calculations and round your answers to three decimals, if necessary. (10 marks) d) Identify the effects of increasing the investment horizon for the proposal to eight years. Assume that the expected annual cash savings are the same as in requirement a). Keep all the other assumptions the same. Shows all your calculations and round your answers to three decimals, if necessary. Should the machining department invest in the new machinery? Explain what would happen in this case and discuss any additional factors that management should consider before making a decision about replacing the machinery. Word limit: 500 words. (30 marks) Total 100 marks