Reference no: EM132752825

A product is currently manufactured on a machine that is not fully depreciated for tax purposes and has a book value of Tk. 270000. It was purchased for Tk. 450000, 25 years ago. The cost of the product are as follows:

(Unit Cost)

Direct cost 35.00
Indirect Cost 37.00
Other Variable O/H 21.25
Fixed O/H 21.50

• In the past years 15500 units were produced. It is expected that the suitable repairs the old machine can be used indefinitely in future. The repairs are expected to average of Tk. 72000 p.a.

An equipment manufacturer has offered the old machine as an exchange for new machine. The new machine would cost 650,000 before allowing for $190000 for the old machine. The product cost associated with the new machine are as follows:

Direct Labour 25.00
Indirect Labor 38.00
Other Variable O/H 20.00
Fixed O/H 19.75

The direct labour cost are allocated from another departments. The old machine can be sold now for $150,000 in the open market. The new machine has an expected life of 15 years and salvage value of $50,000 at that time. The current corporate tax rate is 23%. For tax purpose cost of the new machine and book value of old machine may be depreciated in 15 years. The minimum required rate of return is 12%. It is expected that the future demand of the product will stay at $15,500 units p.a. The present value of annuity of $1 for 15 years @12%. The present value of $1 received at the end of 15th year @12% is 0.183

Problem 1: Should the machine be replaced?