Raj Industries Ltd. is considering the replacement of one of its molding machines. The existing machine...

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Raj Industries Ltd. is considering the replacement of one of its molding machines. The existing machine is in good operating condition but is smaller than required if the firm is to expand its operations. It is 4 years old, has a current salvage value of * 2,00,000 and remaining life of 7 years. The machine was initially purchased for 10 lakh and is being depreciated at 20 percent based on written down value method. The new machine will cost 15 lakh and will be subject to the same method as well as the same rate of depreciation. It is expected to have a useful life of 7 years, salvage value of * 1,50,000 at the seventh year end. The management anticipates that with the expanded operations, there will be a need for an additional net working capital of 1 lakh. The new machine will allow the firm to expand current operations and thereby increase annual revenues by 5,00,000; variable cost to sales ratio is 30 percent. Fixed costs (excluding depreciation) are likely to enhance by * 10,000. The corporate tax rate is 35 percent. Its cost of capital is 10 percent. Should the company replace its existing machine? What course of action would you suggest, if there is no salvage value of the new machine? Raj Industries Ltd. is considering the replacement of one of its molding machines. The existing machine is in good operating condition but is smaller than required if the firm is to expand its operations. It is 4 years old, has a current salvage value of * 2,00,000 and remaining life of 7 years. The machine was initially purchased for 10 lakh and is being depreciated at 20 percent based on written down value method. The new machine will cost 15 lakh and will be subject to the same method as well as the same rate of depreciation. It is expected to have a useful life of 7 years, salvage value of * 1,50,000 at the seventh year end. The management anticipates that with the expanded operations, there will be a need for an additional net working capital of 1 lakh. The new machine will allow the firm to expand current operations and thereby increase annual revenues by 5,00,000; variable cost to sales ratio is 30 percent. Fixed costs (excluding depreciation) are likely to enhance by * 10,000. The corporate tax rate is 35 percent. Its cost of capital is 10 percent. Should the company replace its existing machine? What course of action would you suggest, if there is no salvage value of the new machine?

Answer rating: 100% (QA)

To determine whether Raj Industries Ltd should replace its existing molding machine we need to compare the costs and benefits associated with the repl... View the full answer