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Atler Engineering Company is considering the replacement of one of its existing fabrication machines by a new machine, which is expected to cost Rs 1,60,000.
Atler Engineering Company is considering the replacement of one of its existing fabrication machines by a new machine, which is expected to cost Rs 1,60,000. The existing machine has a book value of Rs 40,000 and can be sold for Rs 20,000 now. It is good for next 5 years and is expected to generate annual cash revenues of Rs 2,00,000 and incur annual cash expenses of Rs 1,40,000. If sold after 5 years the salvage value of the existing machine can be expected to be Rs 2,000. The new machine will have a life of 5 years. It is expected to save costs and improve the quality of the products that would help to increase the sales. The new machine will yeild annual cash revenues of Rs 2,50,000 and incur annual cash expenses of Rs 1,30,000. The estimated salvage value of the new machine is Rs 8,000. The company pays a tax of 35% and can write off depreciation at 25% WDV. The company's opportunity Cost of Capital is 20%. Should Atler replace the existing machine ? Assume that there is no inflation
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