PQ Machines Ltd. has a machine having an additional life of 5 years, which costs ₹2,00,00,000 and which has present book value of ₹50,00,000, which will run for another 5 years without additional maintenance cost and has

To advise PQ Machines Ltd. on whether to replace the old machine, we need to calculate the Net Present Value (NPV) of the new machine. 1. Initial Cash Outflow: Cost of New Machine = ₹4,40,00,000 Less: Sale proceeds of Old Machine = ₹20,00,000 Net Initial Cash Outflow = ₹4,20,00,000 2. Annual Cash Inflows (Savings): Particulars Amount (₹) Cash Inflow Saving in Variable Cost 1,40,00,000 Less: Depreciation on New Machine (₹4,40,00,000 - ₹80,00,000) / 5 years 72,00,000 Less: Depreciation on Old Machine (₹50,00,000 Book Value / 5 years) 10,00,000 Net Depreciation Difference 62,00,000 Net Profit before Tax (1,40,00,000 - 62,00,000) 78,00,000 Less: Tax @ 30% 23,40,000 Net Inflow/Saving after Tax 54,60,000 Add: Depreciation (Non-cash expense, added back) 62,00,000 Annual Cash Inflow (Operating Cash Flow) 1,16,60,000 3. Present Value of Annual Cash Inflows: P.V. of Cash inflow for 5 years = Annual Cash Inflow × PVIFA (12%, 5 years) = ₹1,16,60,000 × 3.605 = ₹4,20,34,300 4. Terminal Cash Inflow (Scrap Value of New Machine): P.V. of scrap value at the end of 5 years = Scrap Value × PVIF (12%, 5 years) = ₹80,00,000 × 0.567 = ₹45,36,000 5. Total Present Value of Cash Inflows: = P.V. of Annual Cash Inflows + P.V. of Terminal Cash Inflow = ₹4,20,34,300 + ₹45,36,000 = ₹4,65,70,300 6. Net Present Value (NPV): NPV = Total Present Value of Cash Inflows - Net Initial Cash Outflow = ₹4,65,70,300 - ₹4,20,00,000 = ₹45,70,300 Conclusion: Since the NPV is positive (₹45,70,300), it is profitable to install the new machine. Therefore, PQ Machines Ltd. should replace the old machine with the new one.