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Illustration 3: A chemical company is considering replacing an existing machine with one costing 765,000....

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Illustration 3: A chemical company is considering replacing an existing machine with one costing 765,000. The existing machine was originally purchased two years ago for 728,000 and is being depreciated by the straight line method over its seven-year lite period. It can currently be sold for 730,000 with no removal costs. The new machine would cost 710,000 to install and would be depreciate over five years. The management believes that the new machine would have a salvage value of 75,000 at the end of year 5. The management also estimates an increase in net working capital requirement of 710,000 as a result of expanded operations with the new machine. The firm is tored at a rate of 55% on normal income and 30% on capital gains. The company's expected after-tax profits for next 5 years with existing machine and with new machine are given as follows: Expected after-tax profits Year With existing machine With new machine 1 2,00,000 2,16,000 2 1,50,000 1,50,000 3 1,80,000 2,00,000 4 2,10,000 2,40,000 5 2,20,000 2,30,000 (a) Calculate the net investment required by the new machine. (b) If the company's cost of capital is 127., determine whether the new machine should be purchased

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