Kandy Corporation is considering a replacement investment. The machine currently in use was originally purchased two years ago for $$\$ 65,000$$. Tax-allowable depreciation is $$\$ 13,000$$ per year for five years. The current market value of this machine is $$\$ 23,000$$.
The new machine being considered would cost $$\$ 140,000$$, and require $$\$ 4,000$$ shipping costs and $$\$ 2,000$$ installation costs. The economic life of the machine is estimated as three years. Tax-allowable depreciation is $$\$ 70,000$$ per year for the first two years. If the new machine is acquired, the investments in accounts receivable is expected to increase by $$\$ 9,000$$, the inventory by $$\$ 13,000$$, and accounts payable by $$\$ 15,000$$. The before-tax net operating cash flow is estimated as $$\$ 120,000$$ per year for the next three years with the old machine and $$\$ 143,000$$ per year for the next three years with the new machine. The expected resale value of the old and new machines in three years' time would be $$\$ 4,000$$ and $$\$ 6,600$$, respectively. The corporate tax rate is $30 \%$.
(a) Calculate the initial investment associated with the proposed replacement decision.
(b) Calculate the incremental operating cash flows of the proposed replacement decision.
(c) Calculate the terminal cash flows associated with the proposed replacement decision.
(d) Compute the NPV of the replacement project assuming a discount rate of $6 \%$ per annum.
(e) What is the proposed investment's IRR?
(f) Use the computed IRR and NPV results and discuss the project accept/reject decision.