a) A company is using a machine the original cost of which was Rs 3,70,000 . the machine is 2 years old and has a remaining useful life of 10 years . It is expected that scrapping the old amchine in 10 years from now will fetch Rs 10,000 but if it is sold now to another firm in the industry it would receive Rs 1,00,000 : the straight line method of depreciation is in effect.
The management is contemplating replacing it with a newer and more efficient machine which costs Rs 420000 and has an estimated salvage value of Rs 20000 after its useful life of 10 years. The new machine will have a greater capacity and annual returns are expected to go up by Rs 40,000 per year. The operatinf efficiency of the new machine will also produce an expected savings of Rs 50,000 a year. The company's tax rate 55%. A 25% investment allowance will apply if the new machine is purchased. Additionally , if the new machine is purchased, inventories will increase by Rs 50,000 receivables by Rs 25000 and payables by Rs 20000 during the life of the project. Determine the economic desirability of the purchase of the machine, assuming the cost of capital to be 12 %