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Rawang Packaging Industries is considering replacing a 10-year-old manual pressing machine with a new automated one. The present and expected situation resulting from the replacement
Rawang Packaging Industries is considering replacing a 10-year-old manual pressing machine with a new automated one. The present and expected situation resulting from the replacement are given below:
Installed Cost of machine Machine cost
Age
Useful Life
Salvage value
Shipping cost delivery of new machine Freight insurance shipping new machine Installation & commissioning new machine
Labour cost Maintenance cost Electricity cost
Account receivable Inventory
Accruals
Account Payable Long-Term Loan
$90,000 n.a
10 years 15 years 0
n.a n.a n.a
$120,000 $ 50,000 $ 75,000
$35,000 $40,000 $10,000 $40,000 $25,000
n.a $200,000 New
5 years
$ 20,000 $ 11,000 $ 4,000 $ 5,000
$100,000 $ 40,000 $ 80,000
$45,000 $60,000 $15,000 $50,000 $95,000
Other information available are:
1. Incremental increase in sales is expected to be $40,000 yearly for the next 5 years.
2. Depreciation is based on a straight-line method.
3. The existing old machine can be sold today for $20,000 and will be worthless at the end
of its useful life.
4. Tax rate is 25%
5. Risk-adjusted hurdle rate = 13.50%
Using NPV and IRR criteria, determine whether the company should proceed with the replacement?
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