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:

Explanation:

Annual operating cash flows   4,45,000

Present value  annuity factor = 435526

Present value of operating cash flows = 2155854

Terminal cash flows  = 5,00,000

Present value factor = 0.56447

Present value of terminal cash flows = 282237

Present value of operating cash flows = 2155854

Present value of terminal cash flows =282237

Initial cash outflows = 1840000

Net present value ( NPV) = 598091