A chemical company is considering replacing an existing machine with one costing Rs 85,000. The existing...

 

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A chemical company is considering replacing an existing machine with one costing Rs 85,000. The existing machine was originally purchased two years ago for Rs 28,000 and is being depreciated by straight line method over seven years. Now, it has book value of 20,000. It can currently be sold for Rs 30,000. The new machine would cost Rs 15,000 to install and would be depreciated over five years. The management believes that new machine would have salvage value of Rs 5000 after five years. An increase of Rs 10,000 in working capital is also expected due to new machine. Tax rate is 40% on ordinary income and 20% on capital gain. The company expected after tax profits before deprecation for next five years with existing machine and new machine are given below. Compute the net investment required by the new machine. Also should company purchase new machine if cost of capital is 15%. Year 1 2 3 Expected After tax Profit before deprecation Existing machine 200,000 150,000 180,000 210,000 220,000 New Machine 236,000 180,000 220,000 260,000 280,000 A chemical company is considering replacing an existing machine with one costing Rs 85,000. The existing machine was originally purchased two years ago for Rs 28,000 and is being depreciated by straight line method over seven years. Now, it has book value of 20,000. It can currently be sold for Rs 30,000. The new machine would cost Rs 15,000 to install and would be depreciated over five years. The management believes that new machine would have salvage value of Rs 5000 after five years. An increase of Rs 10,000 in working capital is also expected due to new machine. Tax rate is 40% on ordinary income and 20% on capital gain. The company expected after tax profits before deprecation for next five years with existing machine and new machine are given below. Compute the net investment required by the new machine. Also should company purchase new machine if cost of capital is 15%. Year 1 2 3 Expected After tax Profit before deprecation Existing machine 200,000 150,000 180,000 210,000 220,000 New Machine 236,000 180,000 220,000 260,000 280,000

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To compute the net investment required by the new machine we need to consider the initial cost of th... View the full answer