XYZ Limited has Lathe that was purchased 10 years ago at a cost of $750, 000 The lathe was used .for trimming molded plastics. The machine had an expected life of 15 years at the time it was purchased. The management believed that time the salvage value would be zero at the end of the 15 years. The machine has been depreciated on a straight line basis; therefore its annual depreciation charge is $50, 000 and its present book value is $250,000/= (750,000- 10(50,000) xyz is considering the purchase of a new special purpose machine to replace the Lathe. The new machine which can be purchased for $1,200,000 (including shipping and installation) will reduce labor and raw materials usage sufficiently to cut annual operating costs from $800, 000 to $450, 000. The reduction in cost will cause the before tax profits to rise by 800,000-450,000=350,000 per year. It is estimated that new machine will have a useful life of 5 years after which it can be sold for $200, 000. The old machine's actual current market value is $100,000 which is below the book value of 250,000 If the new machine is acquired the old Lathe will be sold to another Company rather than exchanged for a new machine. Net working capital requirements is $100, 000. If the lathe is replaced by the new machine this increase will occur at the time of replacement. The projects rate of Return is 15%

Required

1. Should replacement take place? (20 Marks) Note : Depreciation is allowed for tax purposes The company tax rate is 40%