Tat Beng Pte Ltd (TBPL) is considering the purchase of a new drilling machine, model RD2021K, which is expected to substantially increase productivity over AD0001K, the machine currently in use.

The AD0001K was acquired 8 years ago for $120,000 and is being depreciated over 10 years expected useful life with an estimated salvage value of $20,000. The engineering department proposed a major overhaul at an estimated cost of $100,000 at the end of AD0001K’s original useful life. This overhaul will extend the machine’s useful life by another three years. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul is expected to improve the machine’s operating efficiency by approximately 20%. No other operating conditions will be affected by the overhaul.

The cost of purchase for RD2021K, including installation, testing and commissioning, and training is expected to be $240,000. The RD2021K will be depreciated using the straight-line method with no salvage value. New technology will most likely render RD2021K obsolete in five years.

Variable operating cost for either machine is the same: $10 per hour (cash-based). Other relevant data are as follows:

AD0001K	RD2021K
Production volume (per annum)	10,000	10,000
Machine hours	8,000	4,000
Selling price per unit	$100	$100
Variable manufacturing cost - cash based (not including machine hours)	$40	$40
Other annual cash expenses (tooling and supervising)	$95,000	$55,000
Disposal value - today	$40,000	$-
Disposal value - in five years	$-	$50,000

The company’s weighted-average cost of capital (WACC) is 12%, and it is in the 40% tax bracket.

Required:
(a) Prepare a table showing the computation of the effect on cash flow for only items that differ between the two alternatives. Compute the corresponding present value of each alternative based on your cash flow table. (Note: PV factors for 12% are as follows: Year 1 = 0.893; Year 2 = 0.797; Year 3 = 0.712; Year 4 = 0.636; Year 5 = 0.567; the PV annuity factor for 12%, 5 years = 3.605)

(b) Compute the payback period for making the bigger investment in RD2021K  rather than having the AD0001K overhauled in two years’ time.

(c) List two (2) qualitative factors that the company should consider before making  the final decision.