The company is considering replacing part of the current manual labour force by purchasing a small tractor with a forklift for use in loading bricks and concrete blocks. The purchase price would be Sh.570, 000. The tractor will have an economic life of 5 years but would require a Sh.20, 000 overhaul at the end of 3 years. After 5 years the tractor could be sold for Sh.110, 000.
The company estimates it will cost Sh.250, 000 per year to operate the tractor. It will, however, save Sh.130, 000 annually on labour cost. Because of increase in handling efficiency, losses caused by breakages will be cut by Sh.220, 000 per year. Sales will also go up by Sh.450, 000. The new sales level is expected to be maintained throughout the tractor's life. Assume the company's gross margin ratio is 40%, corporate tax rate 30%, and cost of capital 16%. Also assume straight-line method of depreciation