Business, 28.07.2021 22:20 hellokitty1647

The management Biden ltd intends to replace it existing two-year-old milk scheming machine whose original cost wash. 1000,000. The machine is two years old and it has a current market value of sh 700,000. The capital budgeting analysts believe that the machine has five more years of useful life. At the end of the five years, the asset will have a zero-salvage value. The netbook value of the machine is sh 800,000. The management is contemplating the purchase of a new machine to replace the old one. The new machine costs sh 1,600,000 and installation estimated at sh 300,000. It has an estimated salvage value of shs. 200,000 at the end of five-year useful life. The new machine will have a greater technological capacity and therefore annual sales are expected to increase by sh 240,000 operating efficiencies with the new machine will produce an expected savings of shs 260,000 a year. The company uses modified accelerated capital recovery depreciation method of 23% ,17%,20% ,21% and 19% from year one to year five respectively.
The cost of capital is 12% and a 30% tax rate is applicable. In addition, the new machine is purchased, inventories will increase by sh. 300,000 and payables by sh. 100,000 during the life of the project.

Required
1. Compute the projects initial outlay
2. Is the should the replacement be done?

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The management Biden ltd intends to replace it existing two-year-old milk scheming machine whose ori...

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