If retained, a machine would be depreciated at £2,500 for the next four years, at which point it would be fully written down and scrapped. The machine could be sold at any point in the next year for £15,000, the gain being subject to tax at 40 per cent, payable the following year. If it were sold, a new machine costing £80,000 would be bought. The new machine would receive 25 per cent writing-down allowances to be offset annually against profits. It is estimated that the new machine would save material costs of £25,000 per year.

Profits are subject to tax at 40 per cent, payable nine months after the end of the company’s financial period. The new machinery would have a four-year life, with a residual value of zero, and would be depreciated straight line over that period. Prepare a cash flow statement for the replacement option, and indicate how the profits reported in the financial statements would be altered were the existing machine to be replaced.