Q. 4 A firm is currently using a machine which was purchased two years ago for Rs.70,000 and has a remaining useful life of 5 years.

It is considering to replace the machine with a new one which will cost Rs.1,40,000. The cost of installation will amount to Rs.10,000. The increase in working capital will be Rs.20,000. The expected cash inflows before depreciation & taxes for both the machines are as follows:

Year Existing Machine New Machine

1 Rs.30,000 Rs.50,000

2 Rs.30,000 Rs.60,000

3 Rs.30,000 Rs.70,000

4 Rs.30,000 Rs.90,000

5 Rs.30,000 Rs.1,00,000

The firm uses Straight Line Method of depreciation. The average tax on the income as well as on capital gain/loss is 40%.

Calculate the incremental cash flows assuming the sale value of existing machine: (i) Rs.80,000 (ii) Rs.60,000 (iii) 50,000 and (iv) Rs.30,000.