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Bo and Ban Ltd purchased a machine 5 years ago at a cost of Sh 1,000,000. It had an expected life of 10 years at the time of purchase and an expected salvage value of Sh 100,000 at the end of its useful life. It is being depreciated by a straight line.
A new machine can be purchased for Sh 1,500,000 including installations costs. Over its 5 year life, it will reduce cash operating expenses by Sh 500,000 per year. Sales are not expected to change. At the end of its useful life the machine is considered to be worthless.
The old machine can be sold today for Sh 650,000. The firm's tax rate is 35% and the appropriate discount rate is 15%.
Required:
(a) Determine whether the machine should be replaced using the NPV criterion
(b) What other factors should be considered before making the decision at (a) above?
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