the cost of capital and the investment cut off rate for the company is 10 advise the 597773

A company is preparing its capital budget for the year. A question has arisen as to whether or not to replace a machine with a new and more efficient machine. An analysis of the situation reveals the following based on operations at a normal level of activity.

	Old machine	New machine
Cost new	£40 000	£80 000
Book value	£30 000
Estimated physical life remaining	10 years	10 years
Depreciation per year	£4000	£8000
Labour cost per year	£15000	£5000
Material cost per year	£350000	£345000
Power per year	£2000	£4500
Maintenance per year	£5000	£7500

The expected scrap value of both the new and the old machine in 10 years’ time is estimated to be zero. The old machine could be sold now for £20 000.

The cost of capital and the investment cut-off rate for the company is 10%. Advise thecompany.