You are the financial manager of SAC (Pty) Ltd, a manufacturing company. The production manager approaches you to assist him in motivating the purchase of a new production injection moulding machine. The production manager supplied you with the following information:

Proceeds on the disposal of the existing machine	R75 000.00
Cost of the new machine	R1 050 000.00
Installation cost	R50 000.00
Useful life of the new machine	4 years
Estimated salvage value of the new machine	R150 000.00

The annual profit before tax to be as follows:

Year	Profit before interest and tax
1	R295 000.00
2	R325 000.00
3	R365 000.00
4	R385 000.00

Tax rate is 28%

It is decided that the new machine will be sold at the end of its useful life.

Ignore capital gains tax. Accept that all the proceeds on disposal of the machines are subject to the normal tax rate.

The company policies regarding the purchase of new machines:

o The target payback period is within 4years.

o Positive net present value. The company uses a discount rate of 15%.

1. Calculate the annual cashflow of SAC (pty) ltd

2. Calculate the net present value.

3. Advise the production manager if the purchase complies with the companys policies regarding the purchase on new machines.