Company has to replace one of its machines which has become unserviceable. Two options are available:...

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Company has to replace one of its machines which has become unserviceable. Two options are available: (i) A more expensive machine (EM) with 12 years of life, (ii) A less expensive machine (LM) with 6 years of life. If machine LM is chosen, it will be replaced at the end of 6 years by another LM machine. The pattern of maintenance, running costs and prices are as under: Particulars Purchase price Scrap value at the end of life Overhauling is due at the end of Overhauling costs Annual repairs EM 10,00,000 1,50,000 8th year 2,00,000 1,00,000 End of 4th year End of 6th year End of 8th year End of 12th year Years 1 to 6 Years 1 to 12 (3) Cost of capital - 14% You are required to recommend with supporting calculations which of the machines should be purchased. Present Value factors are: 0.5921 0.4556 0.3506 0.2076 3.8890 5.6600 LM 7,00,000 1,50,000 4th year 1,00,000 1,40,000 Company has to replace one of its machines which has become unserviceable. Two options are available: (i) A more expensive machine (EM) with 12 years of life, (ii) A less expensive machine (LM) with 6 years of life. If machine LM is chosen, it will be replaced at the end of 6 years by another LM machine. The pattern of maintenance, running costs and prices are as under: Particulars Purchase price Scrap value at the end of life Overhauling is due at the end of Overhauling costs Annual repairs EM 10,00,000 1,50,000 8th year 2,00,000 1,00,000 End of 4th year End of 6th year End of 8th year End of 12th year Years 1 to 6 Years 1 to 12 (3) Cost of capital - 14% You are required to recommend with supporting calculations which of the machines should be purchased. Present Value factors are: 0.5921 0.4556 0.3506 0.2076 3.8890 5.6600 LM 7,00,000 1,50,000 4th year 1,00,000 1,40,000

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