A newer and more efficient machine

Reference no: EM131117611

a) A company is using a machine the original cost of which was Rs 3,70,000 . the machine is 2 years old and has a remaining useful life of 10 years . It is expected that scrapping the old amchine in 10 years from now will fetch Rs 10,000 but if it is sold now to another firm in the industry it would receive Rs 1,00,000 : the straight line method of depreciation is in effect.

The management is contemplating replacing it with a newer and more efficient machine which costs Rs 420000 and has an estimated salvage value of Rs 20000 after its useful life of 10 years. The new machine will have a greater capacity and annual returns are expected to go up by Rs 40,000 per year. The operatinf efficiency of the new machine will also produce an expected savings of Rs 50,000 a year. The company's tax rate 55%. A 25% investment allowance will apply if the new machine is purchased. Additionally , if the new machine is purchased, inventories will increase by Rs 50,000 receivables by Rs 25000 and payables by Rs 20000 during the life of the project. Determine the economic desirability of the purchase of the machine, assuming the cost of capital to be 12 %

Reference no: EM131117611

Questions Cloud

What steps can a company take to reduce these risks : What steps can a company take to reduce these risks?

Money market account : If he deposits $1200.00 to the savings account, and $1800.00 to the money market account, howmuch money will he have after 6 years?

Find out the leverage ratio : Find out the leverage ratio if the capital structure has Rs 4,00,000 equity and Rs 1,60,0 debt.

What is the value of the new firm debt : Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firm’s assets is $23,200. The standard deviation of the return on the firm’s assets is 27 percent per year,..

A newer and more efficient machine : A company is using a machine the original cost of which was Rs 3,70,000 . the machine is 2 years old and has a remaining useful life of 10 years . It is expected that scrapping the old amchine in 10 years from now will fetch Rs 10,000 but if it is..

Density of the sediments within the rock : According to the Earth Science Reference Tables, which characteristic determines whether a rock is classified as a shale, a sikstone, a sandstone, or a conglomerate?

Equipment sales is in highly cyclic business : Bennet farm Equipment sales is in a highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to the ratio would result in a fluctuating dividend and create uncertainty for the stockholders. ..

Lower of cost or market remmers company : Lower-of-Cost-or-Market Remmers Company manufactures desks. Most of the company's desks are standard models and are sold on the basis of catalog prices.

Explain the difference in stocks and bonds : Explain the difference in stocks and bonds. Explain their market behavior in correlation to each other and why they behave this way. When and how might both stocks and/or bonds be used, why, and in what proportions?

User Account

All Pages