46.6A lf retained, a machine would be depreciated £3,000 for each of the next five 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 £18,000, the gain being subject to tax at 30%, payable the following year. If it were sold, a new machine costing £90,000 would be bought. The new machine would receive 20%

writing-down allowances to be offset annually against profits. It is estimated that the new machine would save material costs of £30,000 per year compared to the current machine. Profits are subject to tax at 30%, payable nine months after the end of the company’s financial period.

The new machinery would have a five-year life, with a residual value of zero, and would be depreciated straight line over that period. Prepare a cash flow forecast for the replacement option, and indicate how the profits reported in the financial statements would be altered were the existing machine to be replaced.