HOW TO DEAL WITH PREMIUM.

TOTAL COST OF OLD MACHINE = 200000

ACCUMULATED DEPRECIATION = 100000

BOOK VALUE = 200000-100000 = 100000

PREMIUM 20%

100000 * 20% = 20000

Book value plus premium = price

100000 + 20000 = 120000

ICO for expansion

Price of new machine

Add installation,

Total cost

Add working capital

ICO

INTERIM CASHFLOW

DESCRIPTION 1 2 3 4 5 (TERMINAL CF)

SALE UNITS 10000 10000 10000 10000 10000

PER UNIT PRICE 10 10 10 10 10

TOTAL SALE 100000 100000 100000 100000 100000

LESS CCOGS 25000 25000 25000 25000 25000

LESS COEXP 10000 10000 10000 10000 10000

OPERATING CF 65000 65000 65000 65000 65000

DEPRECIATION 20000 20000 20000 20000 0

PROFIT 45000 45000 45000 45000 65000

TAX (50) 22500 22500 22500 22500 32500

PAT 22500 22500 22500 22500 32500

DEPRECIATION 20000 20000 20000 20000 0

CF 42500 42500 42500 42500 32500

RESIDUAL VALUE 20000

TAX (10000)

WORKING CAPITAL 10000

52500
Mr. A being a finance manager has been given a task to develop relevant cashflows for the replacement
of a machine. After the preparation of initial cashflow he found the following facts. Incremental unoits
will be 60000 every year which the company would be able to sale every year after replacement of old
machine for the next 5 years. Each uniyt will be able to be sold for 60 Rs. Per unit. CCOGS will 23% and
COE will be 11%. This machine will fall under 3 years property class. Total cost of this new machine was
1200000. Expected residual value will be 35000. Incremental working capital which was added in initial
cash outlay was 5000 Rs. Company pays 50% tax. You are required to calculate interim and terminal
cashflows for this replacement decision.
Question: -

Mr. A has been given a task to develop relevant cashflows for the replacement of a machine which was
bought three years back for 750000 with 3 percent installation and 5% transportation cost. Expected life
of this machine was 5 years and fall under three years property class. With an expected residual value of
28000 and can be sold today for 250000 Rs. Working capital requirement of this machine was 15000 Rs.
This machine can be replace with a new machine which is available for 1300000 with 4% transportation ,
3 percent installation and 1% training cost. Expected life of this machine would would also be 5 years
with an expected residual value of 18000 Rs. By the installation of this machine company would be able
to produce 75000 incremental units per annum. Each unit would be able to be sold for 72 Rs. Per unit
with 22% CCOGS, 11% COE. This machine would also fall under three years property class. Working
capital requirement of this machine would be 10000 Rs. Company pays 40% tax.

Required: - Relevant CF for the replacement decision.