● 22. X Ltd. is determining the cash flow for a project involving replacement of an old machine by a new machine. The old machine bought a few years ago has a book value of `12,00,000 and it can be sold to realise a post tax salvage value of `8,00,000.

It has a remaining life of four years after which its net salvage value is expected to be

`5,00,000. It is being depreciated annually at a rate of 20 percent the WDV method. The working capital associated with this machine is `7,00,000.

The new machine costs `50,00,000. It is expected to fetch a net salvage value of

`25,00,000 after four years. The depreciation rate applicable to it is 20 percent under the WDV method. The new machine is expected to bring a saving of `8,00,000 annually in manufacturing costs (other than depreciation).The incremental working capital associated with the new machine is `2,00,000. The tax rate applicable to the firm is 34 percent.

(a) Estimate the cash flow associated with the replacement project.

(b) What is the NPV of the replacement project if the cost of capital is 15 percent?