● 24. In order to achieve significant economy in operating costs, a manufacturer proposes to replace a manual operation by an automatic one. The automatic device which will cost `60,000 is likely to have economic life of five years with net realizable scrap value of `10,000 at the end. The device, if installed, will reduce operating costs by `15,000 per annum, quality and quantity of output currently produced and sold remaining unchanged. The device will be entitled to straight line depreciation for tax purposes.

Marginal tax rate is 40% and cost of capital has been estimated to be 8%.

Evaluate the proposal and give your recommendation as to its acceptance or rejection.

What happens to your recommendation if tax laws permit depreciation at accelerated rates of 40% in each of the first two years and 20% in the third year, other things remaining unchanged? Explain the genesis of the change, if any.