Question 8 [20]

Humble Beginning Manufacturing Company purchased a specialised production machine a year ago at the cost of R180 000. At that time the machine was estimated to have a useful life of six years with no scrap value. The annual cash operating cost was estimated at R300 000. A new modernised production machine has just come on the market which will do the same job but with an annual cash operating cost estimated at R255 000. The new machine costs R315 000 and has an estimated life of five years with zero scrap value. The old machine can be sold for R150 000 to a scrap dealer. The company uses a straight-line depreciation and the company tax rate is 30%. If the cost of capital is 8% after tax, calculate the following:

8.1. Determine the initial project outlay cost. [4]

8.2. Determine the incremental cash inflow after tax. [5]

8.3. Calculate the NPV of the new investment. [6]

8.4. Calculate the IRR on the new investment. [3]

8.5. What is your recommendation? Explain. [2]