ABC Co . is using a five - year old machine, which was bought for a cost
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ABC Co is using a fiveyear old machine, which was bought for a cost of
The machine is depreciated over its year original life. The current market price of the machine is The salvage value of the machine at the end of its life is estimated to be zero.
The company is thinking of replacing this machine by a new machine which will cost
and would need an installation cost of The life of the machine is estimated to be years with a disposal value of at the end of its life. Because of the greater capacity of the new machine, it is expected that annual sales will increase from to The operating efficiency is not likely to change. The current operating expenses excluding depreciation are The company expects an additional working capital investment of if it buys the new machine. The company's cost of capital is per cent.
Assume that the company will be allowed to depreciate the cost of machine on diminishing balance basis at per cent for tax purposes.
Assume a corporate tax rate of per cent.
You may also assume that no tax is paid on salvage value and it is adjusted for calculating depreciation as per the income tax rules for the block of assets. Would you recommend replacement of the machine? What would be your consideration in arriving at the decision? prepare a proper cash flow table and discount the cashflows at the end
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