The Caledonian Company purchased a machine three years ago for £180,000. Depreciation using a straight line basis, assuming a life of six years and with no residual value, has been recorded each year in the financial statements. The present written-down value of the equipment is £90,000 and it has a remaining life of three years. Management is considering replacing this machine with a new machine that will reduce variable operating costs. The new machine will cost £70,000 and will have an expected life of three years with no residual value. The variable operating costs are £3 per unit of output for the old machine and £2 per unit of output for the new machine. It is expected that both machines will be operated at a capacity of 20,000 units per annum. The revenues from the output of both machines will, therefore, be identical. The current disposal value of the old machine is £40,000 and it will be zero in three years' time. 

  

REQUIREMENT 

Advise the directors of The Caledonian Company as to their optimum policy in this situation.