Company X is tries to decide if the manually operated equipment should be replaced by full automatic equipment. You have the following information:
Current situation
• Two workers with the salary 20 000 USD per year per one worker.
• Maintenance cost is 10 000 USD per year
• Waste (e.g. defective work) is 12 000USD per year
• Economic lifetime of the machinery 10 years (investment was made 5 years ago)
• Salvage value is 0. (e.g. book value in 5 years, also market value is zero)
• Linear depreciation method (8 000 per year)
• Current market value if sold 24 000USD
• Tax rate 34% on EBT
New project
• Investment (new machinery) 120 000USD
• Two workers salary is saved
• Maintenance cost is 15 000USD
• Waste: 6 000USD per year
• Economic lifetime 5 years
• Linear depreciation method
• Book value = market value in five years. (both book and market values are 0)
• Required rate of return is 12%
If using excel, show formulas.
a) Prepare cash flow budget and evaluate the project based on net present value
b) Should the company replace the existing machinery?