, , PAPER NO: 707 (S04 -FINANCIALMANAGEMENTII QUESTION 4 -n째 ~ A firm wants to buy a new machine to replace an old machine bought two’ years ago for $720 000. The old machine is being depreciated for 6 years on straight line. Salvage value after 6 years is O. However the old machine can be sold today for $300 000. The firm has been claiming STAfor 2 years at 25% which is already included in the calculation of profit. The New Machine will cost $1.2 million and will require an additional $50 000 in Working Capital. The New Machine will last for 4 years and be depreciated to zero during that period and have a salvage value of $400 000. Cost of capital is 30%. Number of units Revenue Variable Cost Fixed Cost (include depreciation) Contribution Profit before Interest and Tax Interest . Profit before Tax Tax at 35% Old Machine 100 000 2400 000 (1 000 000) (500 000)-1 400 000 900 000 200 000 700 000 224 000 476 000 * NOTE: Contributions = (2 400 000 -1 000 000) Calculate a) The initial Investment. b) The annual cash flow. c) The terminal cash flow. New Machine 125 000 3200 000 (1 300 000) (1 700 000) 1 900 000 1 200 000 300 000 900 000 315 000 585 000 (6 marks) (10 marks) (4 marks) Hints: Ignore non -cash items and interest expense as a cash flow.