Company faces the decision to either keep an older, more expensive machine, or r

Question

Company faces the decision to either keep an older, more expensive machine, or replace it with a newer machine, which has a limited technical lifetime. All the available data can be found in the table below:

Using only the above data, please determine:

relevant cashflows in the next 3 years will be 6,917 for year1 , year 2 and year 3.

total cost of keeping the old machine for the next 3 years = 78,000

should Assemblor keep or replace the old machine, and explain why ?

Old machine acquisition cost New machine acquisition cost Bookvalue old machine today Yearly operational (outlay) cost old machine Yearly operational (outlay) cost new machine Sales value old machine today Sales value old machine end of useful life Tax rate Remaining useful life old machine in years Useful life new machine in years 80.000,00 50.000,00 30.000,00 16.000,00 9.000,00 31.000,00 25%

Explanation / Answer

1. Initial cash outflow: 50,000 Cost of new machine 31,000 - Scrap value of old machine 29,000 2. Subsequent cash flows benefit ( for 3 years ) Incremental benefit (78,000) - incremental depreciation    4. Incremental benefit ( new machine ) cost as compared to new vs old machine = (16000-9000) = 7000* 3 year= 21000 3. Incremental depreciation Dep : Depreciation on new machine (50,000/3) = rs. 16,667 Dep. On old machine = (30,000/3) = Rs. 10,000 Profit before tax = Rs. 99000 - 6667 = 92333 Tax @ 25% 23083 : 99000-23083 + depreciation added ( 6667 )   82584.00 It may be noted that in the given situation, the benefits are given in the incremental form i.e., the additional benefits contributed by the proposal. Therefore, only the incremental depreciation of Rs. 6667 has been deduced to find out the taxable profits. The same amount of depreciation has been added back to find out the incremental annual cash inflows. Therefore, it would be more profitable to buy the new machine as compared to the old machine

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.