Tingo Ltd. a leading soft drink manufacturer is considering investing in a new machinery to produce a new range of soft drinks. The machinery is expected to cost Rs.9,000,000/- while the accounting profit (before taxes) are expected to be as follows: N Accounting Profit Year (before taxes) (Rs.) 1 2,100,000 2,500,000 3 2,800,000 4 3,100,000 5 2,600,000 The useful life of the machinery is estimated to be 5 years and the machinery is not expected to have a scrap value at the end of the 5th year. The applicable capital allowance rate for tax purpose is 25% per annum and the company depreciates the machinery for accounting purpose on the straight-line basis over useful lifetime of 5 years. The above profits of the company were computed after charging the depreciation on machinery. Tingo Ltd.'s income tax rate is 28% and income tax liability of the company for the year is paid in same year. Cost of capital of the company is 10%.
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