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?