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7. On the other hand, Evergreen company is also considering replacing one of its old production lines with a new one with an advanced technology.

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7. On the other hand, Evergreen company is also considering replacing one of its old production lines with a new one with an advanced technology. It has undergone a market research last year that costed $120K which showed that there is an increase in demand for such a new technology The new production line will cost $3M and is expected to have a salvage value in 6 years for $750K. The existing production line was bought 2 years ago for $1.2M, and can be sold today at a market value of $SOOK. If not sold now, this old machinery is expected to have a salvage value of $100K in 6 years. The project is expected to generate sales in year 1 for $4.2M and thereafter sales are forecasted to grow by 6% a year for the coming 6 years. This is as opposed to the current production line which was expected to generate $3.5M of sales next year and grows by 2% for the coming 6 years. Manufacturing costs are the same under both production lines. The new project requires an initial investment in working capital of $400k. Thereafter working capital is forecasted to grow at the same growth rate of revenues of 6% (CCA rate is 20%, the asset dass will remain open, tax rate is 40% & discount rate is 15%). Calculate the NPV DA (18 Points) 9. Should Evergreen company go ahead with the replacement project? (2 Points) Yes No Indifferent

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