Global Beverage Corporation is considering replacing one of its bottling machines with a newer and more efficient model. The existing machine was…

CA Intermediate · Financial Management and Strategic Management · PYQS · September 2025
Global Beverage Corporation is considering replacing one of its bottling machines with a newer and more efficient model. The existing machine was purchased five years ago for 16,00,000 and has a total useful life of ten years. Currently, the company can sell this machine for 9,60,000. The new machine costs - 32,00,000 having an estimated salvage value of 3,20,000 and a useful life of five years. With the new machine, annual contribution margin is projected to increase from 16,00,000 to 18,40,000 and operating efficiencies are expected to yield further annual savings of 3,20,000. Depreciation is calculated on a straight-line method over the machine's five-year life. The company's cost of capital is 12% and corporate tax rate is 33%. You are required to calculate the Net Present Value of new machine. Given: PVIFA 0.12,5 is 3.605 and PVIF 0.12,5 is 0.567

Suggested Answer and Working Notes:

Calculation of Net Initial Cash Outflows: Particulars ₹ Cost of new machine 32,00,000 Less: Sale proceeds of existing machine (9,60,000) Add: Tax paid on sale of existing machine {(9,60,000 - 8,00,000) x 33%} 52,800 Net initial cash outflows 22,92,800 Calculation of Net Present Value of new machine Particulars ₹ Incremental Contribution 2,40,000 Add: Cost saving 3,20,000 Savings 5,60,000 Less: Incremental Depreciation {5,76,000-1,60,000} 4,16,000 Incremental Profit Before Tax 1,44,000 Less: Tax @ 33% 47,520 Profit After Tax 96,480 Add: Depreciation 4,16,000 Cash Inflow 5,12,480 PVIFA 3.605 PV of Cash Inflow 18,47,490 Add: PV of Salvage Value of new machine (₹ 3,20,000 x 0.567) 1,81,440 Total PV of Cash Inflow 20,28,930 Less: Initial Cash Outflow 22,92,800 NPV (2,63,870) If Tax on sale of existing machine is not taken Calculation of Net Initial Cash Outflows: Particulars ₹ Cost of new machine 32,00,000 Less: Sale proceeds of existing machine (9,60,000) Net initial cash outflows 22,40,000 Accordingly, NPV Will be - 20,28,930 -22,40,000 = (₹ 2,11,070)

Topics: Part-A: Financial Management

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