Reference no: EM132753118

Question: 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.

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).