Question

(c) Karem Bottling Company is considering replacing one of the bottling machines with a more efficient one.

The old machine has a current net book value of Sh.2,400,000 with a remaining useful life of five years. The old machine has an estimated re-sale value of Sh.200,000 at the end of its useful Ii fe.

The existing machine's current disposal value is estimated to be Sh.1,060,000.

The new machine has a purchase price of Sh.4,700,000 and an estimated useful life of 5 years. The machine is expected to have an estimated market value ofSh.600,000 at the end of the five years.

The machine is expected to economise on electric power usage and repair costs which will save the company Sh.920,000 each year. In addition, the new machine is expected to reduce the number of defective bottles which will save an additional amount ofSh.120,000 annually.

The company's corporate tax rate is 30% with a required rate of return of 12%. The company provides for depreciation on a straight line basis.
Assume capital gains are taxable.


Required:
(i) The initial net cash outlay.


(3 marks)


(ii)

(iii)


The incremental net operating cash flows for years I through year 5. The total terminal cash flows.


(4 marks)

(2 marks)

(iv) Using net present value (NPY) criteria, advise the management of Karem Bottling Company whether or not to purchase the new machine. (4 marks)

Answer 1

Step-by-step explanation:

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