Reference no: EM132207107

Question: A company is evaluating whether to replace an old printing machine with a new one.

The following information relates to the two machines

Old Machine
Original Cost Sh. 825,000
Estimated life 10 years
Estimated salvage value Sh. 55,000
Depreciation Method: Straight-line
Book Value: Sh 385,000
Market Value: Sh. 165,000

New Machine
Old Machine
Original Cost Sh. 1,000,000
Estimated life 5 years
Estimated salvage value Sh. 110,000
Depreciation Method: Straight-line
Savings in Production Sh. 143,000 per year
The company marginal tax is 40% and cost of capital is 14%

Required

i) Using the net present value (NPV) method, analyze the replacement decision and state whether or not the old machine should be replaced

ii) What is the benefit of NPV method over the other discounted cash flow budgeting techniques

Note
PVF PVAF
14% 14%
5yrs 0.52 3.43
10yrs 0.27 5.22

Round to the nearest whole number