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SBM Printing Ltd is considering the replacement of one of its existing printing machines

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SBM Printing Ltd is considering the replacement of one of its existing printing machines. The new machine costs $120,000 and if purchased, will bring about an increase in contribution of $35,000 each year for a period of 3 years. As it is fully automated, it will also reduce salary expenses by $20,000 each year. The depreciation per year is $40,000. At the end of the 3-year period, the new machine will be fully depreciated and will be scrapped for $8,000. The existing machine was purchased 3 years ago at a cost of $90,000. Currently, it has been fully depreciated and can be sold for $5,000. Assume tax rate is 20% and the cost of capital is 10% p.a. It is a policy of the company to accept projects with a minimum NPV of $5,000 and a maximum payback period of 3 years Calculate the initial investment resulting from the replacement of the existing machine a)
b) Advise SBM Printing Ltd if it should replace its old machine using (INPV (1) Payback Initial investment = b) Operating cashflow: Yr 1-3 (1) NPV (11) Payback