Gatubia Manufacturing Ltd Case Study - Actual Market Value &  Operating Cost, Cash Flows - Accounting Assignment Help

Assignment Task

THE QUESTION 
Gatubia Manufacturing Ltd owns a machine for making moulded plastics. This machine was purchased 10 years ago at a cost of sh 750,000. The machine had an expected life of 15 years at the time it was purchased, and management originally estimated, and still believes, that the salvage value will be sh 150,000 at the end of the 15-year life. The old machine’s actual market value is sh.200,000.  The machine is being depreciated on a straight-line basis
The company is contemplating to replace the existing machine with a new machine. The research and development manager reports that a new special purpose machine can be purchased for sh1000,000 and incur installation cost of sh 200,000. Over its five-year life, annual the operating cost will reduce by sh.300,000 due to increased efficiency of the machine. It is also estimated that the machine can be sold for sh.220,000 at the end of five years. The machine is to be depreciated on a straight-line basis The company’s tax rate is 30 per cent. Net working capital requirements will increase by sh.100,000 at the time of replacement. The project’s cost of capital is 11.5% p.a
Required: Determine

• The project’s incremental initial outlay.  
• Operating inflows over the project’s life .
• The terminal year cash flows.                   
• The project’s net cash flows for each year. 
• Should the replacement be made? 

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