The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of R600,000 and a remaining useful life of 5 years. The company does not expect to realise any return from scrapping the old machine in 5 years, but it can sell it now to another company in the industry for R265,000. The old machine is being depreciated by R120,000 per year, using the straight-line method. The new machine has a purchase price of R1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of R145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economise on electric power usage, labour, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of R255,000 will be realised if the new machine is installed. The companys marginal tax rate is 35% and it has a 12% WACC.

Required:

1. What initial cash outlay is required for the new machine? (3)
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. (5)
3. What are the incremental cash flows in Years 1 through 5? (5)
4. Should the company purchase the new machine? Support your answer. (3)
5. In general, how would each of the following factors affect the investment decision, and how should each be treated?
   1. The expected life of the existing machine decreases. (2)
   2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year. (2)