Q1.

1. Alfa Ltd. has a machine which was purchased for Rs. 4,80,000 and has been in operation for 2 years and its remaining estimated useful life is 4 years with zero salvage value at the end. Its current market value is Rs. 2,50.000. The management is considering a proposal to purchase an improved model to similar machine, which gives increased output. It is likely to cost Rs. 7,50,000. It has a useful life of 4 years with no salvage value The other relevant particulars are as follows: New Existing 2,000 2,000 50 50 20 Annual Operating hours Selling Price per unit (Rs.) Material Cost per unit (Rs.) Output per hour (units) Labour cost per hour (Rs.) Consumable stores p.a. (Rs.) Repairs and Maintenance p.a. (Rs.) Fixed cash cost p.a. Working Capital requirement (Rs.) 20 30 20 100 200 10,000 25,000 40,000 80,000 30,000 55,000 50,000 1,00,000 The Company follows the written down value method of depreciation @ 25% and is subject to 35% tax. Assuming that the company's required rate of return is 15% on capital investment and the company has several assets in the 25% block, should the company replace the existing machine? Year 1 2 3 4 Discounting factor at 15% 0.870 0.756 0.658 0.572 (15)