A machine used on a production line must be replaced at least every four years. Costs incurred to run the machine according to its age are: Age of…

Working Notes: First of all, we shall calculate cash flows for each replacement cycle as follows: One Year Replacement Cycle Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (1,00,000) (1,00,000) 1 - (18,000) 35,000 17,000 Two Year Replacement Cycle Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (1,00,000) (1,00,000) 1 - (18,000) (18,000) 2 - (23,000) 23,000 Three Year Replacement Cycle Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (1,00,000) (1,00,000) 1 - (18,000) (18,000) 2 - (23,000) (23,000) 3 - (28,000) 12,000 (16,000) Four Year Replacement Cycle Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (1,00,000) (1,00,000) 1 - (18,000) (18,000) 2 - (23,000) (23,000) 3 - (28,000) (28,000) 4 - (34,000) 6,000 (28,000) Now we shall calculate NPV for each replacement cycles. Year PVF@ 15% 1 Year 2 Years 3 Years 4 Years Cash Flows PV Cash Flows PV Cash Flows PV Cash Flows PV 0 1 -1,00,000 -1,00,000 -1,00,000 -1,00,000 -1,00,000 -1,00,000 -1,00,000 -1,00,000 1 0.8696 17,000 14,783 -18,000 -15,653 -18,000 -15,653 -18,000 -15,653 2 0.7561 -23,000 -17,390 -23,000 -17,390 -23,000 -17,390 3 0.6575 -16,000 -10,520 -28,000 -18,410 4 0.5718 -28,000 -16,010 -85,217 -1,15,653 -1,43,563 -1,67,463 Replacement Cycles EAC (₹) 1 Year 85,217 / 0.8696 97,995.63 2 Years 1,15,653 / 1.6257 71,140.43 3 Years 1,43,563 / 2.2832 62,877.98 4 Years 1,67,463 / 2.855 58,656.04 Since EAC is least in case of replacement cycle of 4 years hence machine should be replaced after every fourth year.