Question
Amtek Auto is contemplating the purchase of a more advanced Auto machine to replace the machine currently being used in its production process. The firms
Amtek Auto is contemplating the purchase of a more advanced Auto machine to replace the machine currently being used in its production process. The firms production engineers contend that the newer machine will turn out the current volume of output more efficiently. They note the following facts in support of their contention. The old machine can be used for four more years. It has a current book value of Rs800, 000 and can be sold for Rs.1,000,000 if sold today, but if held to the end of its useful life, the old machine would have an estimated final salvage value of Rs200, 000. The new, advanced machine costs Rs6, 000,000. Its final salvage value is projected to be Rs1500, 000 at the end of its four-year useful life. Bothe the old and new machines falls into the Plant and machinery category for WDV depreciation (25%). Rs.50,000 of extra N.W.C will be required at the start and will be available at the end of the project. The new machine will generate revenues of Rs.3,000,000 per year for 4 years while the old machine would have generated revenues of Rs.1,000,000 per year for 4 years. Operating cost will increase by Rs.500,000 if new machine is purchased. Income taxes on incremental profits are paid at a 40 percent rate. Calculate the expected annual incremental cash flows for years 1 through 4, as well as the estimated initial cash outflow.
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