Question

Sharan Ltd. has an existing machine having a remaining life of 6 years and has a book value
of Rs. 3,00,000. A new machine costing Rs. 20,00,000 is available. Though its capacity is
same as that of old machine, it will mean savings in variable costs to the extent of Rs.
6,00,000 per annum. The life of the machine will be 6 years at the end of which it will have
scrap value of Rs. 5,00,000. The company follows straight line method of depreciation. The
tax rate is 30% and company's required rate of return is 10% per annum. The old machine, if
sold today, will realize Rs. 1,00,000; it will have no salvage value if sold at the end of 6th
year. You are required to find out:
(a) Initial cash outflows
(b) Annual operating cash flows
(c) Terminal cash flows
(d) NPV
And advise whether machine should be replaced or not.
(Consult the table at the end of the paper for different factors)​

Answer 1

Answer:

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Answer 2

From the given

a) Intial cash outflow is 1840000

Intial cash flow = Fixed capital + Working capital - Salvage + (Salvage - Book value) * Tax

= 1840000

b) Annual operating cash flow is 2155854

Annual operating cash flow = Net income - change in working capital + non cash expenses.

= 2155854

c) Terminal cash flow = 282237

Terminal cash flow = Salvage value + Tax on salvage + Recovery on net working capital.

= 282237

d) NPV is 598091

Net present value =

$\frac{ r_{t} }{ {(1 + i)}^{t} }$

= 598091.