Reference no: EM132066726

Rough Jobs Pty Ltd is a manufacturing business based in Tasmania. Their company tax rate is 30%. It is considering the replacement of a manually operated machine with a fully automated model. Currently 6 full-time operators are needed to operate the machine. This labor costs the company $320,000 p.a. in wages, holiday pay and compulsory superannuation payments to the employees’ selected funds. In addition, maintenance costs are $32,000 per year. The machine was bought 4 years ago for $200,000. The Australian Tax Office schedule includes the asset in the 12 year useful-life category and only allows prime cost depreciation 4 (with no residual) for this type of plant and equipment. The company believed that the machine normally would be taken out of service at the 12-year point. The current disposal value of the machine presently in use is $50,000. The new model has a purchase price of $570,000. It is estimated that shipping and installation would cost $30,000. Maintenance on the new machine would be $60,000 p.a. but the adoption of that machine would cut the cost of defects from $20,000 to $4,000 per year. The new machine is in an 8 year useful life tax category (with no residual). As the machine will undergo heavy use, the company believes the 8 years may be quite accurate. The company expects the manufacturing business will close down after 8 years of operation of the new machine and that the machine will have no re-sale value at that point. The required rate of return for projects of this risk level is 10%. Required: (a) Determine the cash flows associated with this replacement project. (b) Compute the NPV and advise if you would recommend the project. Included in your summing-up of the project you should make a comment on the IRR value of the project and why the IRR would have to be more or less than required rate of return.