Reference no: EM132741314

Aussie Boilers Pty Ltd is a major supplier of boilers for mining companies in the north of Western Australia. It is considering to replace an old welding machine with a state-of-the-art welding machine that would increase the sale revenues from $ 35,000 to $100,000. The new machine would cost the company $500,000 to purchase and has a life of 10 years. It also has an estimated salvage value of $50,000 at the end of its life.

• The old machine was purchased 5 years ago at a cost of $300,000 and the accumulated depreciation shown in accounting records is $150,000. It has a remaining life of 5 years and as that time it will be worthless. However, the company can sell the old machine to other companies in the industry now for $180,000. Both the old machine and the new machine are depreciated using the straight-line method. The company has a tax rate of 30 percent and its required rate of return is 10 percent per annum.

Problem 1: Should the company replace the old machine now or later in five years time? (Show all workings and state any assumptions that may be necessary).