Royal Industries Ltd. is considering the replacement of one of its moulding machines. The existing machine is

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Royal Industries Ltd. is considering the replacement of one of its moulding machines. The existing machine is in good operating condition but is smaller than required if the firm is to expand its operations. The machine is 5 years old, has a current salvage value of `30,000 and a remaining depreciable life of 10 years. The machine was originally purchased for ₹75,000 and is being depreciated at

₹5,000 per year for tax purposes.

The new machine will cost ₹1,50,000 and will be depreciated on a straight-line basis for tax purposes over 10 years, with no salvage value. The management anticipates that with the expanded operations, there will be a need of additional net working capital of `30,000. The new machine will allow the firm to expand current operations and thereby, increase annual sales from ₹4,00,000 to ₹4,40,000; annual operating costs from ₹2,00,000 to ₹2,10,000. The company’s tax rate is 35 per cent and its cost of capital is 10 per cent. Should the company replace its existing machine? Assume that the loss on sale of existing machine can be claimed as short-term capital loss in the current year itself.

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