Sami from THE COMPANY visited Shanghai wanted to assess its commercial viability to buy a new machine that provide items with a different coating $,$ the company spent $$8,600$ on his trip. The New machine cost $$290,000$ delivered to Port clearance, handling, and installation cost for $$22,500.$

The company wanted to asses if the new production coating tools would impact demand. Nadia assign a marketing research agency for $$15,400.$

Three weeks later, the marketing agency released a promising report. They anticipated that THE COMPANY could grow sales of its newly designed tools and accessories by $8\%$ in the first year and $3\%$ annually after that. That exceeded their $2\%$ annual sales growth target. THE COMPANY sales and variable cost of items manufactured and sold were $$2,750,000$ and $$1,760,000$ last year. THE COMPANY predicted that the new machine would maintain unit manufacturing costs. THE COMPANY expects other fixed manufacturing, selling, and administrative expenses to remain the same and will pay salespeople $2\%$ commission.

The old equipment cost $$225,000$ five years ago. One can buy it for $$130,000.$ Depreciation on the existing machine was calculated using a $15-$year straight$-$line timeline with no residual salvage value. The new machine should last ten years and be worth $$18,000$ when it's done. The new machine will be depreciated straight$-$line over $10$ years with no residual salvage value.

THE COMPANY has a $24\%$ marginal tax rate and a $15\%$ weighted average cost of capital. THE COMPANY will use cash and a $$140,000$ bank loan to buy the machine. The bank loan has $7\%$ annual interest.

Instructions:

Ahmad wants a capital budgeting study on whether THE COMPANY should replace the equipment. Following reports and talks with THE COMPANY staff, you found that THE COMPANY's net working capital has consistently been $20\%$ of yearly revenues. Use Excel to: $1.$ Create a $10-$year cash flow prediction.

Determine Net Present Value and Internal Rate of Return.

$3.$ Your suggestion.

$4.$ How would your answer alter with a $3\%$ inflation forecast?