Krishna Gems Ltd has just installed Equip.-R at a cost of Rs 2,00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1,50,000 units, which can be sold at Rs 6 per unit. Annual operating costs are estimated at Rs 2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs 3 per unit for the same level of production. Krishna Gems Ltd has just come across another model called Equip.-S capable of giving the same output at an annual operating cost of Rs 1,80,000 (exclusive of depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs 2,50,000 and the estimated life is for 5 years with no residual value. The company has an offer for sale of Equip.-R at Rs 1,00,000. The cost of dismantling and removal will be Rs 30,000. As the company has not yet commenced operations, it wants to sell Machine-R and purchase Equip.-S. Nine Gems Ltd will be a zero-tax company, for seven years in view of several incentives and allowances available. The cost of capital may be assumed at 14 per cent. Advise whether the company should opt for replacement or not.
Krishna Gems Ltd has just installed Equip.-R at a cost of Rs 2,00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1,50,000 units, which can be sold at Rs 6 per unit. Annual operating costs are estimated at Rs 2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs 3 per unit for the same level of production.
Krishna Gems Ltd has just come across another model called Equip.-S capable of giving the same output at an annual operating cost of Rs 1,80,000 (exclusive of depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs 2,50,000 and the estimated life is for 5 years with no residual value.
The company has an offer for sale of Equip.-R at Rs 1,00,000. The cost of dismantling and removal will be Rs 30,000. As the company has not yet commenced operations, it wants to sell Machine-R and purchase Equip.-S. Nine Gems Ltd will be a zero-tax company, for seven years in view of several incentives and allowances available. The cost of capital may be assumed at 14 per cent. Advise whether the company should opt for replacement or not.
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