A company is preparing its capital budget for the year. A question has arisen as to whether or not to replace a machine with a new and more efficient machine. An analysis of the situation reveals the following based on operations at a normal level of activity.

The expected scrap value of both the new and the old machine in 10 years' time is estimated to be zero. The old machine could be sold now for 20 000. The cost of capital and the investment cut-off rate for the company is 10%. Advise the company.

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Cost new Book value Estimated physical life remaining 10 years Depreciation per year 4000 Old machine 40000 30000 New machine 80 000 10 years 8000 Labour cost per year 15000 5.000 Material cost per year 350000 345 000 Power per year 2000 4 500 Maintenance per year 5000 7 500