LSM Ltd is considering the replacement of one of its machines. The following information summarizes the new versus old machine costs:

$\backslash$table$[[,$New machine,Old Machine$],[$Annual cost of defects,$20,70],[$Net operating income,$580,580],[$Book value of equipment,$350,100],[$Salvage value $($today$),$NA$,150],[$Salvage value $($Year $5),50,-],[$Shipping cost$,20,$NA$],[$Installation cost$,30,$NA$],[\backslash$table$[[$Remaining project life$],[($years$)]],5,5],[\backslash$table$[[$Net operating working$],[$capital$]],60,60],[$Salaries$,100,200],[$Fringe benefits,$10,20],[$Maintenance$,60,20]]$

LSM Ltd faces a $30\%$ marginal tax rate and uses a $15\%$ discount rate to evaluate equipment purchases for its automobile scrap operation.

The appeal of the new machine is that it is more automated $($requires two fewer employees to operate the machine$).$ The older machine requires four employees with salaries totaling Tshs $200$ million and fringe benefits costing Tshs $20$ million. The new machine cuts this total in half. In addition, the new machine is able to separate out the raw materials which reduces the annual cost of defects which are Tshs $20$ million with the new machine compared to Tshs $70$ million for the older model. However, the added

$7$

automation feature comes at the cost of higher annual maintenance fees of Tshs $60$ million compared to only Tshs $20$ million for the older machine.

Should LSM Ltd replace the older machine with the newer one?