Dufei Company Limited is preparing it's capital budget for the year. A question has arisen as to whether or not to replace a machine with a new and more efficient one. An analysis of the situation reveals the following, based on operations at a normal level of activity.

OM. NM ('000). ('000) 64 Cost New 128 48 Bk Value. --- 10yr EPLR 10yrs ('000). ('000) . 6.4 Dep per yr. 12.8 24. Lab C per yr. 8.0 560 Mat C per yr 552. 3.2 Power per yr 7.2 8.0 Maintenance. 12

The expected residual value of both new and old machine in 10 years' time is estimated to be zero. The old machine could be sold now for 32,000.00

The cost of capital and the investment cut- off rate for the company is 10%

Requirement: Advice the company.

Key to abbreviations: OM= Old machine NM= New machine EPLR=Estimated physical life remaining C= Cost Yr= Year (s).