# answer question a correctly, and show sample calculation/formula used A manufacturer has set up a project for developing a new machine for one of its

answer question a correctly, and show sample calculation/formula used A manufacturer has set up a project for developing a new machine for one of its production
lines. The engineering department has provided a project proposal that estimates the following
investment requirements: I )An initial investment of 300,000\$ to be paid for purchasing the new machine. iij An additional cost is needed to install the machines and integrate it into the overall
production system and it is estimated to take one (1) year for completion. There are three
cost categories involved: . Engineering labour cost, estimated to be 1200 hours at a cost of 100\$lhour. – None—engineering labour cost estimated to be 3000 hours at a cost of 50\$fhour. – Assorted material cost, estimated to be 100100035. iv) The machine has to be overhauled every 2 year, and it costs 2010003; beginning in the
third year of the project. They will not overhaul the machine in the last year of its life. v} The production will be started in the second year, and it will be up—to—sp-eed by the end
of that year. vi} Projected manufacturing cost savings and added proﬁts are estimated to be 100,000\$
in the ﬁrst year of operation and are expected to peak at 250,000\$ in the third year of
operation and then to follow the gradually declining pattern shown in Table 1. vii) Project life is expected to be 8 years. viii) It is estimated that the machinery will have a salvage value of 50,000\$ at the end of
the operation. Table 1. Cost saving and added profits of project
Year of production
Profit (\$)
100,000
230,000
250,000
243,000
227,000
a) If the company has a 10 percent hurdle rate for capital investment, estimate the Net
Present Value (NPV) of the project.
(10 marks)
b) would happen to the NPV of the above project, if the inflation rate was expected
to be 1.5% per year? Comment on the project whether to be accepted or rejected.
(10 marks)

(550 words)

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