Mega bakes Limited is evaluating whether to replace a two years old labor-intensive machine that has three more useful years with a new automated machine in its bakery business. The company has provided you with following details. The two-year-old machine was purchased at a cost of Ksh 4,000,000 and has a salvage value of Ksh 500,000. It is depreciated using straight-line with a salvage value though in the market, it is expected to sell at Ksh 300,000 at the end of its useful life. If it is sold today, it expected price is Ksh 2,000,000 This machine is used to produce loaves of bread. A loaf of bread has a direct material cost of Ksh 15 and direct labour of Ksh 20. Annual cash operating expenses are Ksh 1,200,000. The machine produces 900,000 loaves per year. A loaf of bread sell at Ksh 50 and selling cost per loaf is Ksh 5. In the next three tears, the above costs, selling price and production volume is expected to remain constant The proposed new automated machine will cost Ksh 12,500,000. It has an expected life of 3 years and salvage value of Ksh 800,000 though it is expected to sell at Ksh 300,000 at the end of its useful life. The new machine will initial require a working capital of Ksh 400,000 and annual cash operating expenses will be equal to 12% of annual sales. To produce a loaf of bread using the new machine, cost of direct material will remain the same but labour cost will lower by 40%. Production and sales volume will increase to 1.200,000 loaves per year over the next three years. Selling price and selling cost will remaining the same as under the old equipment. Straight-line depreciation method is used on both machines, all gains and losses will be taxed at 30% and company's discounting rate is 20% Required. Advice whether replacement should occur 20 marks