10. X Company is using a fully depreciated machine having a current market value of 2 million. The salvage value of the machine eight years from now would be zero. The company is considering replacing this machine by a new one costing *10.25 million, and having an estimated salvage value of 1.25 million. With the use of the new machine, annual sales are expected to increase from 8 million to 9.25 million. Operating efficiencies with the new machine will save 1.25 million per year as operating expenses. Depreciation will be charged on written down basis at 25 per cent. The cost of capital is 11 per cent. The new machine has a 8-year life and the company's taxation rate is 30 per cent. Assume that book profit or loss from the sale of the asset are taxable at corporate tax rate. Should the company replace the old machine? Show calculations on incremental cash flow basis. How would your decision be affected if another new machine is available at a cost of 17.5 million with a salvage value of $2.5 million. The machine is expected to increase sales by 1.25 million a year and save 3 million of operating expenses annually over its 8-year life.