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NKIT Ltd. a manufacturing company produces 25,000 litres of special lubricants in its plant. The existing plant is not fully depreciated for tax purposes and has a book value of ?3 lakhs (it was bought for ?6 lakh six years ago). The cost of the product is as under: Particulars Cost/Litre (?) Variable costs Fixed Overheads 60.00 15.00 75.00 It is expected that the old machine can be used for further period of 10 Years by carrying out suitable repairs at a cost of ?2 lakh annually. A manufacturer of machinery is offering a new machine with the latest technology at ?10 lakhs after trading off the old plant (machine) for ?1 lakh. The projected cost of the product will then be: Particulars Cost/Litre (?) Variable costs Fixed Overheads 45.00 20.00 65.00 The fixed overheads are allocations from other department plus the depreciation of plant and machinery. The old machine can be sold for ?2 lakh in the open market. The new machine is expected to last for 10 years at the end of which, its salvage value will be ?1 lakhs. Rate of corporate taxation is 50%. For tax purposes, the cost of the new machine and that of the old one may be depreciated in 10 years. The minimum rate of return expected is 10% It is also anticipated that in future the demand for the demand for the product will remain at 25,000 litres. Advice whether the new machine can be purchased ignores capital gain taxes. [Given: PVIFA (10%, 10 years) = 6.145, PVIF (10%, 10 years) = 0.386]
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