on Navly Ltd. has a machine which has bee no salvage value in the end Its curre proposal to purchase a new voxel te Cost of machine a for ¥ years Its remaining useful life is 5 years with narket value is % 2,00,000 ‘The company is considering @ jeplace the existing machine Existing Machine New Machine ‘ 7 1.10,000, 7 10,00,000 stimated life 1 ypers 5 Salvage value ni) eho Annual output w. oon Qe 75007 units Selling price per unit UIs v5 Annual operating hours 3,000 3,000 Matenal cost per unit ta tw Labour cost per hour z40 270 Indirect cash cost per annum 50,000 265,000 The company uses Written Down Value depreciation (a) 20% block of ‘The corporate tax rate is 30% and teeth 89 Disrewmt Rute Advise WX Ltd. whether the existing machine should be replaced or not and it has several other machines in the Xavly Ltd. does not make any investment, if it yrelds (CA Nov. 2008) [Ans: NPV 2 3.28.964] — Q33. An existing company has a machine which has been in operation for two years, its estimated remaining a9) Gelul life is 4 years with no residual value in the end, fs current market value is & 3 lakhs. The x management is considering a proposal to purchase an improved model of a machine gives increase ou output, The details are as under Particulars Existing Machine| New Machine Purchase Price %6,00,000 2 10,00,000 Estimated Life 6 years 4 years Residual Value 0 0 Annual Operating days 300 300 Operating hours per day 6 6 Selling price per unit t10 z10 Material cost per unit 2 22 Output per hour in units 20 40 Labour cost per hour 20 230 Fixed overhead per annum excluding depreciation 21,00, 60,000 Working Capital fetmooh (&2.00,000) Income-tax rate 30% 30% ‘Assuming that - cost of capital is 10% and the company uses written down value of deprecianion @ 20% and it has several machines in 20% block. Advice the management on the Replacement of Machine as per the NPV method. The discounting factors tuble given below: Discounting Factors [ Year 1 | Year 4 [10% ~ | 0909 WoNd Four years ago, Z Lid, had pure! (CA July 2021) wsed « machine of % 4,80,000 having estimated useful life of 8 years with zero salvage value. Depreciation is charged using SLM method over the useful life. The company ‘wants to replace this machine with a new machine. Details of new machine are as below:Qas . yew machine is © 12.00.00 Vendor of thie ina hine is agreed to take old machine at a oF 02.40.00 Cost of dismantling ant removal of ol machine will be ® 40,000. KOR of net {will be joni on apt andl venminingt wll he paid at the endl af one year . ‘ration Will he charged (a 20% jy 0 anor WIV metho! . . nol wselhl Hite oF new mach Years ant has salvage value of © 1,00,000 at the ere © Incremental annual sates revemne ix €12,25,000 © Contirbution mangin ie 80% Incremental indirect cost Cexchuting deprecintion) is @ 1,18,750 per ye © Adklitional working capital of & 2,50,000 ix required at the beginning of year one anal ©4,00,000 a the beginning of ye three. Working capital at the end of year four will be na 4 Tax rate is 10% © Hanore tay on eapital gain Z-LAd will not make any additional investinent, iit yields less than 12%, Advice, whether existing machine should be replaced oF not ve 1 2 4 4 7 si) PVIF ony Noy 0.797 0712 0.016 0867 —_ a (CA May 2023) HMR Ltd. is considering replacing a manually operated old machine with a fully automatic new machine The old machine had been fully depreciated for tox purpose but has a book value of & 2,40,000 on 3st March 2021. The machine has begun causing problems with breakdowns and it cannot fetch more than © 30,000 if sold in the market al present, It will have no realizable value after 10 years. The company has been offered © 1,00,000 for the old machine as a trade in on the new machine which has a price (before allowance for trade in) of & 4,50,000, The expected life of new machine is 10 years with salvage value of @ 35,000. Further, the company follows straight fine «lepreviation method! but for tax purpose, written down value method depreciation (@ 7.5% is allowed taking that this isthe only machine in the block of assets Given below are the expected sales anal costs ftom both ofl and new machine Old machine New machi ~8,10,001 F8,10,000 © ales Material cost 180,000 1,26,280 Labour cost 135,000 1,10,000 Variable overhead 56,250 47,800 Fixed overhead 90,000 97,800 Depreciation 24,000 41,800 PBT 424,750) 1,87,280 Tax «) 30% 97.425 Lots PAT 2,27,928 TOTS From the above information, ANALYSE whether the obt machine should be replacedt oF not AF requureat rate of return is 10%? hynore capital yain tax PY factors (i) 10%: Yew [ 1 | 2 | pve | 0.909 [0.420 4 Hot 6 0) S04 3 4 ’ x ’ wo O75 OOS OSLY [0407 | O42 | OROT sme =| e Weus TT Mudie Machine al ouput 30000 wait FRv00 won [Te] owpuf per puss] lowenit (hove Ht fhe pl “Tee = - ral rail COs 2.24 £ A aoe z 260 “re Cette Ie Fributieoa_perunip 2400 20 Toto comforbusion] (1c) 2boooo GIO less: indies} cosh cost _-50800 — per #hmy~ ——— | . 7160000 _% F500 O_— : bY. 5 > 5 _hy @ Cureee2 GgseOo Net cash Sov \ Zon a, ——Tingemen fu opemabinig ChAT 23000 pa Tf Nw oching i's pistol - | coucealeat lent _fogcreremnfue) _ traf of Dern a —_Bisfrrag Nea _ ftudune ~ Ma Chamne 330000 Cena) 2¢4oo 0 Lus@ 20r, (g2'%00) 11200 — © 20y. C4 2240 ) eae 1646.0 +1000000, Eneementu Vee of $0000) CO ‘200000 J Dep'n Cin Bods) years Tnererend Tor suvimy PyviP Pver goro OTe 20 SUN ZUSHE OCT DAY ASFBN COTO TOT4saza = WERG STS Ocoee sp Had epee repre rn =D Tres FayGad heres OP? 1040p rade Muchine shun pe —AuL pak eveny carsNoge—{ _ et 4 New _prchioe 20000) 0 { Shy |ay! 5000 0 L EP ZOO |= swe of old Machive - Cs00d0) Soin tux on Sul. ‘200006 Palfigs outlay 2020006 : Roe 8 0320