Replcement Project:

KFUPM is planning to replace it heavy duty printing machine with a newer model that is faster and better quality. The existing machine has a life of 5 years and 2 years of them has passed. Now KFUPM is evaluating replacing this machine with the newer model which has a life of 3 years. KFUPM hired you to analyze the proposed replacement and you collected the below information.

New Machine:

Life of machine: 3 years

The cost of the new machine is SAR 1,081

The machine will increase the gross profit every year by SAR 336

The market value of the machine when sold at the end of its life is SAR 195

If replaced, then the net working capital (NOWC) will increase every year by SAR 22

KFUPM will recover all investments in working capital at the end of the new machine's life (after 3 years).

Old Machine:

Life of machine is 5 years. 2 years has past. Effective remaining life of the machine is 3 years.

Orginal cost of the existing machine is SAR 852

Total depreciation of the past 2 years is SAR340.8

If KFUPM decided to go with the replacement proposal, then the existing machine can be sold right now at SAR 186

The market value of the machine when sold at the end of its life is zero (3 years from today)

WACC is

8.56%

Tax rate is 40%

Both machines use straight-line Depreciation.

Calculate the follwoing:

Notes: 1. Use 2 Decimals 2. It is advisable to solve the question using Excel or on paper, and then put your relevant answers here: Depreciable base SAR is A1. New Machine: Yearo Yeart Year2 Year3 NOPAT + Dep. Year3 A2. Cash Flows from Working Captial (WC): Yearo (-) change in NOWC *make sure to put the correct sign Year1 0 Year2 0 A3. Cash Flows from the Initial Outlay (10): Yearo (-) 10 *make sure to put the correct sign A4. Cash Flows from Terminal Cash Flows (TCF): Year3 TCF *make sure to put the correct sign A5. Free Cash Flows for New Machine (FCF newl: Year1 Year2 Year3 A5. Free Cash Flows for New Machine (FCF_new): Yearo FCF_new *The sum of A1-A4 B1. Existing Machine: Yearo Year1 Year2 Year3 NOPAT + Dep. Year1 Year2 Year3 B2. Cash Flows from Working Captial (WC): Yearo (-) change in NOWC *make sure to put the correct sign X B3. Cash Flows from the Initial Outlay (10): Yearo (-) 10 *make sure to put the correct sign X B4. Cash Flows from Terminal Cash Flows (TCF): Year3 TCF *make sure to put the correct sign Year1 Year2 Year3 B5. Free Cash Flows for Existing Machine (FCF_Old): Yearo FCF_Old *The sum of B1-B4 C. Relevant CF: Yearo Year1 Year2 Year3 Relevant FCF D. NPV =