Synix Manufacturing Ltd owns a machine for making moulded plastics. This machine was purchased 10 years ago at a cost of sh 2,100,000. The machine had an expected life of 15 years at the time it was purchased, and management originally estimated, and still believes that the salvage value will be sh 500,000 at the end of the 15-year life. This machine actual current market value is sh.600,000. The machine is being depreciated on a straight-line basis The company is contemplating to replace the existing machine with a new machine.

The research and development manager reports that a new special purpose machine can be purchased for sh3,000,000 and incur installation cost of sh 400,000. Over its five-year life, annual the operating cost will reduce by sh.600,000 due to increased efficiency of the machine. It is also estimated that the machine can be sold at market rate for sh.840,000 at the end of five years. However, its salvage value will be sh.600,000 at the end of the five years. The machine is to be depreciated on a straight-line basis The companys tax rate is 30 per cent. Net working capital requirements will increase by sh.200,000 at the time of replacement.

The projectscost of capital is 11.5% per annum.

Required:

Determine

1. The projects incremental initial outlay. 6 marks
2. Operating inflows over the projects life. 5 marks
3. The terminal year cash flows. 4 marks
4. The projects net cash flows for each year 2 marks
5. Using the net present value approach, advice the management of the company on whether to replace the existing machine? 3 marks