1. A2Z Ltd. is considering the replacement of one of its machines. The firm wants to expand its operations and hence requires bigger machines. The existing machine is in good operating condition, but is smaller. It is 3 years old, has a current salvage value of Rs. 4,00,000, and a remaining life of 5 years. The machine was initially purchased for Rs. 20 lacs and is being depreciated at 20% on the WDV basis. Its salvage value at the end of its useful life is estimated to be negligible.

The new machine will cost Rs. 40 lacs and will be subject to the same method as well as the same rate of depreciation. It is expected to have a useful life of 5 years. TI1e management anticipates that with the expanded operations there will be a need for an additional net working capital of Rs. 1,00,000 at the beginning. The new machine will allow the firm to expand its current operations and thereby increase its cash annual revenue by Rs. 25,00,000. The variable cost will be 50 percent of the sale. Annual fixed cash costs are likely to increase by Rs. 1,00,000 in the first three years of its operation and Rs. 1,50,000 thereafter. It is estimated that the new machine can be sold for Rs. 6,00,000 at the end of its useful life. The corporate tax rate is 30%. Finn's cost of capital is 10%. The company has several machines in the block of 20% depreciation. Using NPV technique, comment on whether the company should replace the existing machine. (Round off your calculations to the nearest rupee).

PVlF at I0% cost of capital is given below for your ready reference:

Year l 2 3

PVIF at 10% 0.909 0.826 0.751

4

0.683

5

0.621