18, Dec 2020
Finance,Life of a machine

ABC Ltd has a machine with an additional life of five years which cost Rs.10 lakhs and has a book value of Rs.4,00,00 the new machinery costing Rs.20 lacs is available though its capacity is same as that of the old machine it will lead to a saving in variable cost to the extent of Rs.7,00,00 per annum the life of the machine will be five years at the end of which it will have a scrap value of Rs.2 lakhs the income tax rate is 40% and as policy the form does not make an investment if the yield is less than 12% per annum the old machinery sold today will release Rs.1,00,00 it will have no salvage value were sold at the end of five years the company uses straight line method of depreciation capital gain on sale of old machine is also subject to the tax rate of 40% advice ABC Ltd whether or not the old machine should be replaced