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A chemical company is considering replacing an existing machine with one costing Rs 65,000. The existing machine was originally purchased two years ago for Rs
A chemical company is considering replacing an existing machine with one costing Rs 65,000. The existing machine was originally purchased two years ago for Rs 28,000 and is being depreciated by straight line method over seven years. It can currently be sold for Rs 30,000 with no removal cost. The new machine would cost Rs 10,000 to install and would be depreciated over five years. The management believes that new machine would have salvage value of Rs 5000 after five years. An increase of Rs 10,000 in working capital is also expected due to new machine. Tax rate is 55% on ordinary income and 30% on capital gain. The company expected after tax profits for next five years with existing machine and new machine are given below: Expected After tax Profit Existing machine New Machine Year 1 2 3 4 5 200,000 150,000 180,000 210,000 220,000 216,000 150,000 200,000 240,000 230,000 Compute the net investment required by the new machine. Also should company purchase new machine if cost of capital is 15%
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