Royale manufacturers Ltd is considering the replacement of one of its moulding machines. The existing machine is in good operating condition, but is smaller than required if the firm is to expand its operations. It is $4$ years old, has a current salvage value of ksh$.200,000$ and a remaining life of $6$ years. The machine was initially purchased for ksh $1,000,000$ and is being depreciated at $20$ per cent on cost$.$ The new machine will cost Ksh $1,500,000$ and will be subject to the same method as well as the same rate of depreciation. It is expected to have a useful life of $6$ years, salvage value of Ksh $150,000$ at the sixth year end. The management anticipates that with the expanded operations, there will be a need of an additional net working capital of KSh$100,000.$ The new machine will allow the firm to expand current operations and thereby increase annual revenues by Ksh $500,000$; variable cost to volume ratio is $30$ per cent. Fixed costs $($excluding depreciation$)$ are likely to remain unchanged. The corporate tax rate is $30$ per cent. Its cost of capital is $10$ per cent. The company has several machines in the block of $20$ per cent depreciation.

a$)$ Should the company replace its existing machine? $(10$ Marks$)$

b$)$ What course of action would you suggest, if there is no salvage value? $(7$ Marks$)$

c$)$ What other considerations should inform the replacement decision?