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    Capbud Ex

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    Mohd Shoaib Khan
    A plastic manufacturing company is considering replacing an older machine that was fully depreciated with a new machine costing Rs 40,000. The new machine would reduce annual labor costs by Rs 8,000 over its eight-year life and require no changes to other expenses or revenues. The company requires a 10% after-tax return on investment and has a tax rate of 35%.

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    Capbud Ex

    Uploaded by

    Mohd Shoaib Khan
    39 views18 pages
    A plastic manufacturing company is considering replacing an older machine that was fully depreciated with a new machine costing Rs 40,000. The new machine would reduce annual labor costs by Rs 8,000 over its eight-year life and require no changes to other expenses or revenues. The company requires a 10% after-tax return on investment and has a tax rate of 35%.

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    A plastic manufacturing company is considering replacing an older machine that was fully depreciated with a new machine costing Rs 40,000. The new machine would reduce annual labor costs by Rs 8,000 over its eight-year life and require no changes to other expenses or revenues. The company requires a 10% after-tax return on investment and has a tax rate of 35%.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    39 views18 pages

    Capbud Ex

    Uploaded by

    Mohd Shoaib Khan
    A plastic manufacturing company is considering replacing an older machine that was fully depreciated with a new machine costing Rs 40,000. The new machine would reduce annual labor costs by Rs 8,000 over its eight-year life and require no changes to other expenses or revenues. The company requires a 10% after-tax return on investment and has a tax rate of 35%.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    A company is currently considering modernization of a

    machine originally costing Rs. 50,000


    (current book value zero).
    However, it is in a good working condition and can be sold for
    Rs 25,000. Two choices are available.
    One is to rehabilitate the existing machine at a total cost of Rs
    1,80,000;
    and the other is to replace
    the existing machine with a new machine costing Rs 2,10,000
    and requiring Rs 30,000 to install.
    The rehabilitated machine as well as the new machine would
    have a six year life and no salvage value.
    The projected
    after-tax profits under the various alternatives are:

    Expected after-tax profi ts

    Year Existing machine Rehabilitated machine New machine

    1 Rs 2,00,000 Rs 2,20,000 Rs 2,40,000

    2 2,50,000 2,90,000 3,10,000

    3 3,10,000 3,50,000 3,50,000

    4 3,60,000 4,00,000 4,10,000

    5 4,10,000 4,50,000 4,30,000

    6 5,00,000 5,40,000 5,10,000


    The firm is taxed at 35 per cent. The company uses the straight
    line depreciation method and the same is allowed for tax
    purposes.
    The cost of capital is 12 per cent.
    Advise the company whether it should rehabilitate the existing
    machine or should replace it with the new machine.
    A plastic manufacturing company is considering replacing an
    older machine which was fully depreciated for tax purposes
    with a new machine costing Rs 40,000.
    The new machine will be depreciated over
    its eight-year life. It is estimated that the new machine will
    reduce labour costs by Rs 8,000 per year.
    The management believes that there will be no change in other
    expenses and revenues of the firm due to the machine.
    The company requires an after-tax return on investment of 10
    per cent. Its rate of tax is 35 per cent.
    Caselet:

    The United Petroleum Ltd (UPL) has a retail outlet of


    petrol, diesel and petroleum products.
    Presently, it has two pumps exclusively for petrol, one for
    non-lead petrol and one for diesel. Free air filling is carried
    out for vehicles buying fuel from the outlet.
    The pumps have a useful life of 10 years with no salvage
    value as the underground tank will be completely corroded
    and unfit for reuse.
    The UPL sells petrol and diesel @ Rs 23 and Rs 10 per
    litre respectively. The existing annual sales is petrol, 5 lakh
    litres, and diesel, 2 lakh litres. Its earnings are 4 per cent as
    commission on sales.
    Due to a manifold increase in traffic, the existing pumps are not able to
    meet the demand during peak hours. The UPL is contemplating
    installation of additional pumps for diesel and petrol at a cost of Rs
    10,00,000 together with additional working capital of Rs 5,00,000. The
    additional sales of petrol and diesel are expected to be 2 lakh litres and 1
    lakh litres per annum respectively.
    As a result of the installation of the new pump, the operating cost would
    increase by Rs 24,000 annually by way of salary of the pump operator.
    Other yearly associated additional costs are estimated to be: insurance @
    1 per cent of the cost of the pump, maintenance cost, Rs 12,000 and power
    costs, Rs 13,000.
    United Petroleum Ltd pays 35 per cent tax on its income. Depreciation
    will be on straight line basis and the same is allowed for tax purposes.
    The management of UPL seeks your advice on the financial viability of
    the expansion proposal.
    Prepare a report for its consideration, assuming 12 per cent required rate
    of return.

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