Tech Motor is a leading manufacturer of alloy wheels for car enthusiasts. Lee is the financial manager of the firm and is responsible for analysing the companys financial issues. The production department has proposed the purchase of a new CNC One-stop Manufacturing System (COMS) to improve the production capacity and quality of its alloy wheels. The new manufacturing system is expected increase the firms net revenue (before taxes and depreciation expenses) by $240,000 in each of the next four years. Lee has also obtained the following information from the production manager:

	Proposed situation	Existing situation
Initial purchase price	$1,500,000	$1,000,000
Shipping and installation cost	$300,000	$200,000
Required net working capital	$430,000	$350,000
Annual cost of maintenance	$260,000	$320,000
Current market value (CMV)	Not applicable	$800,000
Expected salvage value	$0	$0
Existing usage	0 years	2 years
Expected economic life	4 years	6 years

Tech Motor uses the straight-line depreciation method on all its production machinery with the marginal tax rate of 18%.

Lee conducted an analysis for the issue described in Question 1.The Chief Financial Officer (CFO), who was pleased with Lees work, revealed that the required rate of return for this replacement proposal should be 15%. The CFO asked Lee to further investigate the project.

Required:

a. Find the NPV, PI and IRR of this replacement proposal. Based on your findings, should the replacement be carried out?

b. Explain why you will not use the payback period method to evaluate this replacement proposal.

c. Assume that the purchasing manager is negotiating with the COMS supplier for a discount on the purchase price. What is the minimum percentage discount that the supplier should offer in order to attract Tech Motor to purchase the system?