Company A has a machine, details of which are as follows:

R R

Cost 3500 000 Tax value 1600 000

Realisable value 2000 000 Book value 1800 000

It produces widgets on this machine. The output and costs are as follows:

Output per annum 5400 units

Variable cost per unit 400

Fixed costs per annum (incl depreciation) 600 000

The selling price of a widget is R800. The machine is operating at full capacity. The company

has the opportunity of replacing the machine with a second hand machine of larger capacity at a

cost of R3m. This machine will result in a variable cost of R350 per unit and fixed costs of R900

000 per annum (including depreciation). Both machines will have a remaining useful life of five

years and the book and tax values will be written off on a straight-line basis over this period.

They will have no residual value.

Required:

Calculate the output required of the replacement machine to make an investment in it

worthwhile. The company uses discounted cash flow to evaluate such proposals and uses a

rate of 10% after tax. Note that the rate of corporate tax is expected to be 28% throughout the

period. (SAICA QE - adapted)