1. Altima Ltd, a manufacturer of edible oils, is contemplating the purchase b. of a new oil processing machine to replace the existing one. The existing machine was acquired two years ago at a cost of Shs.4,000,000. The useful life of this machine was originally expected to be five years with no salvage value, but after a critical analysis, the financial analyst has now estimated that the machine will have an economic life of 10 years with a salvage value of Shs.500,000.

The new machine is estimated to cost Shs.8,000,000 and Sh400,000 would be incurred in installing the machine. The new machine is estimated to have a useful life of 10 years. An expert in asset valuation estimates that the existing machine can be sold at Shs. 2,500,000 in the open market. The new machine is expected to lead to increased sales. To support the increased sales, debtors would increase by Shs. 320,000, stock by Shs.140,000 and creditors by Shs. 300,000.

The estimated profit before depreciation and tax over the next 10 years for the two machines is as given below:

Year	New Machine Shs.	Old Machine Shs
1	350,000	280,000
2	400,000	300,000
3	420,000	320,000
4	410,000	340,000
5	410,000	340,000
6	380,000	320,000
7	380,000	310,000
8	350,000	280,000
9	300,000	260,000
10	280,000	240,000

The companys cost of capital is 10%. Corporation tax applicable is 30%. The company uses the straight line method of depreciation.

Required

1. Initial investment required for replacement of the old machine.
2. An evaluation of whether it is worthwhile to undertake the replacement ii. of the machine.