Pintoo industries Ltd is considering the replacement of one of its moulding machines. The existing machine is in good operating condition, but is smaller than required if the firm is to expand its operations. The old machine is 5 years old, has a current salvage value of Rs 30,000 and a remaining depreciable life of 10 years. The machine was originally purchased for Rs 75000 and is being depreciated at Rs 5000 per year for tax purposes.The New machine will cost Rs 1,50,000 and will be depreciated on a straight line basis over 10 years , with no salvage value. The management anticipates that, with the expanded operations, there will be need of an additional net working capital of Rs 30,000. The new machine will allow the firm to expand current operations, and thereby increase annual revenues of Rs 40,000, and variable operating costs from Rs 200000 to Rs 2,10,000. The company's tax rate for all purpose is 35% and its cost of capital is 10 %. Should the company replace its existing machine? Assume that the loss on sale of existing machine can be claimed as short term capital loss in the current year itself. ( The table values to be used for 1-9years 5.759 and for 10th year is .386)

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To determine whether the company should replace the existing machine we need to calculate the net pr... View the full answer