After completing her MBA, Ms Nalini joined TMC Ltd on 31 December 2018 Her first assignment was to evaluate an option to replace one of the old semi automatic packing machine with a fully automatic variant which was expected to result into substantial cost savings The following details about the machines was shared with her1 (a) The company had earlier (in September 2014) spent 100 on hosting various vendors of the new technology (b) The book value of the existing machine as on 31 December, 2014 was 600 whereas the market price on the same date was 500 The existing machine was good to run for another five years The estimated scrap value at the end of the five years was zero (c) Apart from the annual maintenance contract worth 50 per year, which is paid at the beginning of each year, the firm had to spent Rs 250 at the end of the second year (31 12 2020) on major repairs This amount is fully deductible for tax purpose in the same year (d) Other annual operating costs (incurred at the end of each year) of the existing machine were Labour 800 Power 200 (e) The processing time using the existing machine was 3 days and the average work in progress will continue to be 600 (f) The cost of the new (fully automatic) machine was 1,000 and the useful life was five years The estimated scrap value at the end of five years was 200 (g) The annual maintenance contract was worth 100 per year, paid at the beginning of each year starting from 1 January, 2019 Other annual operating costs (incurred at the end of each year) of the new machine were Labor 400 Power 300 (h) The work in progress (WIP) inventory is expected to reduce by 200 from the existing level due to a reduction in the processing time by 2 days Assume that the market value of WIP equals the book value (i) The tax rate for business profits and for capital gains loss on sale of machine was 30 The company used straight line method of depreciation for tax purpose Ms Nalini has sought your help in this decision She remembers her professor mentioning that the replacement decisions are evaluated based on the present value of differential(with without the investment) cash flows, but was not sure of how to compute them Assume discount rate to be 10 and show your detailed workings

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After completing her MBA, Ms. Nalini joined TMC Ltd. on 31 December 2018. Her first assignment was to evaluate an option to replace one of

After completing her MBA, Ms. Nalini joined TMC Ltd. on 31 December 2018. Her first assignment was to evaluate an option to replace one of the old semi-automatic packing machine with a fully-automatic variant which was expected to result into substantial cost- savings. The following details about the machines was shared with her1:

(a) The company had earlier (in September 2014) spent 100 on hosting various vendors of the new technology.
(b) The book value of the existing machine as on 31 December, 2014 was 600 whereas the market price on the same date was 500. The existing machine was good to run for another five years. The estimated scrap value at the end of the five years was zero.
(c) Apart from the annual maintenance contract worth 50 per year, which is paid at the beginning of each year, the firm had to spent Rs. 250 at the end of the second year (31/12/2020) on major repairs. This amount is fully deductible for tax purpose in the same year.
(d) Other annual operating costs (incurred at the end of each year) of the existing machine were: Labour: 800 & Power: 200.
(e) The processing time using the existing machine was 3 days and the average work in progress will continue to be 600.
(f) The cost of the new (fully-automatic) machine was 1,000 and the useful life was five years. The estimated scrap value at the end of five years was 200.
(g) The annual maintenance contract was worth 100 per year, paid at the beginning of each year starting from 1 January, 2019. Other annual operating costs (incurred at the end of each year) of the new machine were: Labor: 400 & Power: 300.
(h) The work-in-progress (WIP) inventory is expected to reduce by 200 from the existing level due to a reduction in the processing time by 2 days. Assume that the market value of WIP equals the book value.
(i) The tax rate for business profits and for capital gains/loss on sale of machine was 30%. The company used straight line method of depreciation for tax purpose.

Ms. Nalini has sought your help in this decision. She remembers her professor mentioning that the replacement decisions are evaluated based on the present value of differential(with - without the investment) cash flows, but was not sure of how to compute them. Assume discount rate to be 10% and show your detailed workings.