FINANCIAL MANAGEMENT

Chartered accountancy profession-2

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Capital budgeting(20marks)

Introduction of capital budgeting

Capital budgeting is the process of
evaluating and selecting long term
investment that is in line with the goal
of investors wealth maximization.
The capital budgeting decision are
important,crucial and critical business
decisions due to..
 Substantial expenditure involved,
 Long period for therecover of
benefit ,
 Irreversibility of decisions and
 The complexity involved in capital
investing decision.
1.Yes Enterprises, an existing company, is considering the introduction
of a new product. The new product envisages the purchase of new
machinery costing Rs 40, 00,000 including freight and installation
charges. Investment allowance rate on purchase of equipment is 20%
which can be claimed as deduction at the end of year one. The useful life
the equipment is five year, with an estimated salvage value of Rs 15,
75,000 at the end of that time. The machine will be depreciated for tax
purposes by using straight line method at a rate of 10%.
Additions to current assets will require Rs 500,000 at the
commencement of the proposal and will be increased in subsequent
years on the basis of operating revenue. At the start of each subsequent
years, Investment in working capital will need to be 10% of operating
revenue for that year. The production capacity of new machine is 12 lakh
units and capacity utilization during the 5-year life of the project is
expected to be as indicated below:

Year 1 2 3 4-5
Capacity utilization% 25 50 75 100
The average price per unit of the product is expected to be Rs. 20 netting
a contribution of 40 percent. The annual fixed cost, excluding
depreciation, are estimated to be Rs. 40 lakh from the third year
onwards; for the first and second year it would be Rs. 20 lakh and Rs. 30
lakh respectively. In addition to this, Yes enterprises shall require a
factory which will be taken at rent at Rs 50,000 per month and will
increase by 10% in each of the two years.
It may be assumed that all cash flows are received or paid at the end of
the each year and that income taxes are paid one year in arrears at an
annual rate of 30% for both revenue and capital gains/losses. Yes
enterprises has a target debt to value ratio of 20%. The company in the
past has raised debt at 11% and it can raise fresh debt at 10%.
Yes enterprises plans to follow dividend discount model to estimate the
cost of equity capital. The company plans to pay a dividend of Rs 2 per
share in the next year. The current market price of company's equity
share is Rs 20 per equity share. The dividend per equity share of the
company is expected to grow at 3% per annum. Evaluate the proposal.

2.The Elixir Construction Ltd has recently got a contract for

construction of National Highway near Pokhara. The Elixir would
require vehicles to be used by its engineers for inspection of the sites.
One option before the Elixir is to hire the inspection vehicles from
Continental Tours and Travels Ltd. Hiring charges would be Rs 9000 per
day for 80 Kilometers for 8 hours a day and Rs 70 per Km beyond 80
Kms. The overtime rate for drivers would be Rs 250 per hour beyond 8
hours. It is estimated that, on an average the inspection vehicles would
be required for 10 hours per day and 100 kms per day. The hiring
charges, including extra charges and overtime, would be increased by
10% every year.
The chief engineer Mr. Biki Sharma has submitted an alternative
proposal to the CEO, Bikram Pandey to buy a Tata Safari costing Rs 70
lakh, Tata would buy back its vehicles after 5 years for Rs 20 lakh. The
associated operating costs are estimated as follows.
1) Drivers Salary, Rs 80,000 per month, Annual increments 3%
2) Drivers Overtime beyond 8 hours, Rs 300 per hour
3) Insurance of the vehicles, 1% of the depreciated value each year
4) Annual Maintenance costs, year 3-5, Rs 150,000
5) Fuel charges: year 1-2, Rs 30/km, year 3, Rs 35/km, and year 4-5, Rs
40/km
6) Annual Depreciation: SLM
Required:
The CEO seeks the opinion of the CFO, Mr. Neeraj Aryal, on the two
alternative proposals for the required inspection vehicle. What advice
should Neeraj give? Why? Assume 35% tax and 10% required rate of
return for Elixir.
3. An iron ore company is considering investing in a new processing
facility. The company extracts ore from an open pit mine. During a year,
1, 00,000 tons of ore is extracted. If the output from the extraction
process is sold immediately upon removal of dirt, rocks and other
impurities, a price of Rs 1,000 per ton of ore can be obtained. The
company has estimated that its extraction costs amount to 70 per cent of
the net realizable value of the ore.
As an alternative to selling all the ore at Rs 1,000 per ton, it is possible to
process further 25 per cent of the output. The additional cash cost of
further processing would be Rs 100 per ton. The proposed ore would
yield 80 per cent final output, and can be sold at Rs 1,600 per ton.
For additional processing, the company would have to install equipment
costing Rs.1001akh. The equipment is subject to 25 per cent
depreciation per annum on reducing balance (WDV) basis/method. It is
expected to have useful life of 5 years. Additional working capital
requirement is estimated at Rs. 10 lakh. The company's cut-off rate for
such investments is 15 per cent. Corporate tax rate is 35 per cent.
Assuming there is no other plant and machinery subject to 25 per cent
depreciation, should the company install the equipment if
a) The expected salvage is Rs 10 lakh and
b) There would be no salvage value at the end of year 5. Assuming there
are other plants and machinery subject to 25 per cent depreciation (i.e.
in the same block of assets). What course of action should the company
choose?

4.Elixir Limited has just completed over a period of one year, the
development of a new product, called "Noda". It now wishes to decide
whether to proceed with the manufacture of the product. The following
information is available:
1. The development of new product required one year time of three
employees in the research department. These employees earned Rs.
450,000 each per annum on average. Various materials and components
had to be purchased especially for the development work at a cost of Rs.
427,000.
 2. The selling price of the product would be set at Rs. 900. It is expected
that production and sales would be 10,000 units per annum for the first
five years and 15,000 units per annum for the balance of three years.
3. Production of the Noda would require three types of material:
a) Material A: To be purchased specially for the project at a cost of Rs. 40
per kg.
b) Material B: The purchase price of Material B is now Rs. 25 per kg and
is not expected to rise over the period of the project
c) Material C: For this item, there is no further use other than the Noda.
There are 10,000 kgs of material C in stock, which was bought at Rs. 50
per kg. It could be sold as scrap for Rs 20 per kg and its current purchase
price is Rs. 55 per kg, which is not expected to change over the period of
the project.
4. Each unit of Noda requires 3 kgs of Material A, 2 Kgs of Material B, and
1 kg of Material C.
5. Fifteen work hours would be required for each unit at a wage rate of
Rs. 22 per hour. For the first year of operation, an additional labour cost
of Rs. 15 lakh is also required.
6. Other variable costs of the project will be Rs. 160 per unit.
7. Inflation now being completely under control, no increase in costs
over the life of the project is expected.
8. Two machines will be needed for the project’s two processes. The first
process, known as Vega, will require a machine purchased especially at a
cost of Rs. 30,00,000 which would have a residual value of Rs. 3,00,000 at
the end of eight years. Second process Mega can be carried out on a
machine which is already owned by Elixir Ltd. This Machine has a book
written down value of Rs. 750,000. If the Noda is not produced, the
machine will be sold for Rs. 500,000. The old machine requires a
maintenance cost of Rs. 50,000 for year 1 and it will be increased by Rs.
20,000 per annum over previous years for the remaining years. At the
end of eight years, it will be valueless.
9. Sales may be assumed to take place and production costs to be
incurred on the last day of each year. The cost of capital of Elixir Ltd is
17% per annum. Assume corporate tax rate to be 25% and applicable
capital gain tax to be 15%. The company writes off depreciation as per
the straight-line method which is permissible for tax purposes.
10. Initial working capital will be Rs, 25,00,000 needed for the project
and it will be fully realized at the end of project life. Establish whether or
not it is worthwhile to go ahead with the production of the product Noda
with supporting computations based on the estimates given.

5. The Board of ABC Co has decided to limit investment funds to Rs.10

million for the next year and is preparing its capital budget. The
company is considering five projects, as follows:
Initial investment(Rs) net present value(Rs)
Project A 25,00,000 1,000,000
Project B 22,00,000 1,550,000
Project C 26,00,000 1,350,000
Project D 19,00,000 1,500,000
Project E 5,000,000 To be calculated

All five projects have a project life of four years. Projects A, B, C and D are
divisible, and Projects B and D are mutually exclusive. All net present
values are in nominal, after-tax terms.
Project E
This is a strategically important project which the Board of ABC Co has
decided must be undertaken in order for the company to remain
competitive, regardless of its financial acceptability. Information
relating to the future cash flows of this project is as follows:
Year 1 2 3 4
Sales volume(units) 12000 13000 10000 10000
Sales price(Rs/unit) 450 475 500 570
Variable cost(Rs/unit) 260 280 295 320
Fixed cost(Rs ‘000) 750 750 750 750
These forecasts are before taking account of selling price
inflation of 5·0% per year, variable costs inflation of 6·0% per
year, and fixed cost inflation of 3·5% per year. The fixed costs
are incremental fixed costs which are associated with Project E.
At the end of four years, machinery from the project will be sold
for scrap with a value of Rs. 400,000. Tax allowable
depreciation on the initial investment cost of Project E is
available on a 25% reducing balance basis and ABC Co-pays
corporation tax of 28% per year, one year in arrears. A
balancing charge or allowance is available at the end of the
fourth year of operation. ABC Co has a nominal after-tax cost of
capital of 13% per year
Required:

a) Calculate the nominal after-tax net present value of Project E

and comment on the financial acceptability of this project.

b) Calculate the maximum net present value which can be

obtained from investing the fund of Rs.10 million, assuming
here that the nominal after-tax NPV of Project E is zero.

c) Discuss the reasons why the Board of ABC Co may have

decided to limit investment funds for the next year.

6. Synergy Ltd. has just installed Machine- M at a cost of Rs.210,

000. The machine has a five year life with no residual value.
The annual volume of production is estimated at 150,000 units,
which can be sold at Rs.6 per unit in the first two years and at
Rs.7,8 and 9 in the third, fourth and fifth years. The first year’s
operating costs are estimated at Rs.200, 000 (excluding
depreciation) at this output level. Fixed costs are estimated at
Rs.3 per unit for the same level of production. The second
year’s cost will be the same as in the first year. Thereafter, costs
(operating and fixed) will increase over the first year’s cost by
10%, 20% and 25% respectively in the third, fourth and fifth
years.

Synergy Ltd. has just come across another model called

Machine-N capable of fiving the same output at the same fixed
and operating costs as in the first year of Machine- M. There
will be no change over the first year’s costs in the next four
years also. Capital cost of this machine is Rs.250, 000 and the
estimated life is five years with nil residual value. The company
has an offer for sale of Machine- M at Rs.110,000. But the cost of
dismantling and removal will amount to Rs.40,000. As the
company has not yet commenced operations, it wants to sell
Machine- M and purchase Machine- N. Synergy Ltd. will be a
zero-tax company for seven years in view of several incentives
and allowances available. The cost of capital is 15%.
(i) Advise whether the company should opt for the
replacement.

(ii) Will there be any change in your view, if machine-M has not
been installed, but the company is in the process of selecting
one or the other machine?

7. Biratnagar Chemicals Industry supplies chemicals and dyes to

various units in and around Province 1. The onsite delivery of chemicals
and dyes every month is 2,000 units. The unit sale price is Rs. 100. The
cost per unit is Rs. 50. It is using Minivan which can carry a maximum of
80 units. The total distance covered in one trip is 400 kms. The cost of
diesel in the Province 1 is Rs. 25.5 per liter. The average consumption of
diesel is 8 kms per liter.
Due to increase in demand for dyes for industrial use, Biratnagar
Chemicals Industry has an opportunity to make and deliver 2,500 units
per month. To cater to the increased demand, the company is
contemplating buying a mini truck with a capacity to carry 165 units.
The required mini truck is available from Eicher for Rs. 1,400,000. The
minivan being currently used has a book value if Rs. 600,000. It can be
sold for Rs. 400,000. The annual salary of the minivan driver is Rs. 6,000
per month. It the mini truck is acquired, Biratnagar Chemicals Industry
would have to increase his monthly salary to Rs. 8,000. The consumption
of diesel by the mini truck would average 5 kms per liter. The annual
maintenance cost of the mini truck would be Rs. 8,500 compared to Rs.
6,200 maintenance cost of the minivan. Biratnagar Chemicals Industry
uses straight-line method of depreciation for tax purposes. The minivan
has a remaining useful life of 5 years. The mini truck could serve the
need of the Biratnagar Chemicals Industry for the next 5years. The
applicable tax rate is 35 percent. Assume that loss on sale of existing
machine can be claimed as short-term capital loss in the current year
itself. Sukmit Banjade, the CEO of the Biratnagar Chemicals Industry, has
asked the CFO, Raj Kumar Aryal, to examine the financial viability of the
proposal to replace the minivan by the mini truck and make appropriate
recommendation in this regard. Assume a required rate of return of
14%.

8. Shrawan Chemicals Ltd. supplies chemicals to various industries

located in Kathmandu valley. The onsite delivery of chemicals every
month is 2,000 units. The unit sale price is Rs. 200. The cost per unit is
Rs. 100. It is using a small delivery truck which can carry a maximum of
100 units. Total distance covered in one trip is 500 kms. The cost of
diesel is Rs. 100 per litre. The average consumption of diesel is 10 kms
per litre.
Due to increase in demand for chemicals for industrial use, Shrawan
Chemicals Ltd. has an opportunity to make and deliver 3,000 units per
month. To cater to the increased demand, the company required a larger
truck with a capacity to carry 200 units. The required truck is available
at Rs. 20 lacs with 25% down payment and 5 year’s payment term in
equal annual principal amount along with interest at 10% p.a. The truck
will have salvage value of Rs. 10 lacs at the end of 5th year. The small
delivery truck being currently used has a book value of Rs. 5 lacs and it
can be sold for Rs. 2 lacs. The salary of the small delivery truck driver is
Rs. 10,000 per month. If larger truck is acquired the salary costs will
increase to Rs. 15,000 per month. The consumption of diesel by larger
truck would average 5 kms per litre. The annual tax and maintenance
cost of the larger truck would be Rs. 100,000 as compared to Rs. 60,000
that of small delivery truck. Shrawan Chemicals Ltd. is availing straight
line method of depreciation for tax purposes. The small delivery truck
has remaining useful life of 5 years. The applicable tax rate is 25%.
Assume that the loss on sale of existing truck can be claimed as short-
term capital loss at the end of current year itself. The equity share
holders of Shrawan Chemicals Ltd. are asking for rate of return of 15%
p.a. As financial advisor to Shrawan Chemicals Ltd. you are required to
make appropriate suggestion based on your calculations.

9. Z Ltd. is a diversified company operating in different industries. The

shares of the company are traded in the stock exchange and currently
has a market price of Rs. 320 per share. The company‟s dividend
payment over the last five years are as follows:

year 2018 2017 2016 2015 2014

DPS(Rs) 35 32 30 29 28
The board of directors of Z Ltd. are currently considering two main
investment opportunities: one in Solar Energy and the other in the Hotel
and Tourism sector. Both projects have short lives and their associated
cash flows are as follows:
Year
1 2 3
Solar
energy(in.million)
85 75 60
Hotel & Tourism(in
million)
80 95 50
The investment in Solar Energy would cost Rs. 400 million while that in
Hotel and Tourism would cost Rs. 405 million. The management of the
company has identified the industry beta of Solar Energy and Hotel and
Tourism as 1.2 and 1.6 respectively. However, a research conducted by
management revealed that Z Ltd.‟s beta is 1.5. The average return on the
companies, listed on the stock exchange, is 25% and the yield on
Treasury bill is 20%. The growth rate is 5.7%.

Required:
i) Compute the net present values of both projects using the company‟s
weighted average cost of capital as a discount rate.
ii) Compute the net present values using a discount rate which take into
account the risk associated with the individual projects.

10. BCD Ltd. specializes in the production of “spring table water” for
which it has distributors both in the Northern and Southern parts of
Nepal. The consumers of the product in the East and West parts of Nepal
are clamoring for more branches in each of these areas to enable them
have this product within their easy reach. The Managing Director of the
company formed a project team to study the feasibility of the branch
expansion project as well as its overall financial requirement. The team,
after serious meetings and deliberations, submitted its report
containing the following information relating to the branch to be opened
in the Eastern part of Nepal:

 Initial investment - Rs. 350,000 with nil scrap value.

 Expected life span - 10 years
 Sales volume - 20,000 units per annum
 Selling price - Rs. 20 per unit
 Direct variable cost - Rs. 15 per unit
 Fixed cost excluding depreciation - Rs. 25,000 per annum
.  IRR - 17%
. The Managing Director is concerned about the viability of the
project as the IRR is close to the company‟s hurdle rate of 15%.
Therefore, he wanted you to evaluate the project very well so that it does
not run into a loss. Present value of annuity at company's hurdle rate for
10 years is 5.0188.
Required:
i) Compute the sensitivity of the NPV to each of the following variables:
a. Sales price b. Sales volume c. Initial outlay d. Variable cost
ii) From your calculation in (i) above, determine the two most sensitive
variables and interpret the result.

11. After extensive research and development, Goodweek Tires Ltd.,

has recently developed a new tire, the Super Tread, and must decide
whether to make the investment necessary to produce and market it.
The tire would be ideal for drivers doing a large amount of wet weather
and off-road driving in addition to normal freeway usage. The research
and development costs so far have totaled about Rs. 10 million. The
Super Tread would be put on the market beginning this year, and
Goodweek expects it to stay on the market for a total of four years. Test
marketing costing Rs. 5 million has shown that there is a significant
market for a Super Tread-type tire. Goodweek must initially invest Rs.
120 million in production equipment to make the Super Tread. This
equipment can be sold for Rs. 51 million at the end of four years.
Goodweek intends to sell the Super Tread to two distinct markets:
a. The original equipment manufacturer (OEM) market: The OEM
market consists primarily of the large automobile companies that buy
tires for new cars. In the OEM market, the Super Tread is expected to sell
for Rs. 3,600 per tire when introduced. The variable cost to produce each
tire is Rs. 1,800 in first year of production.
b. The replacement market: The replacement market consists of all tires
purchased after the automobile has left the factory. This market allows
higher margins; Goodweek expects to sell the Super Tread for Rs. 5,900
per tire there. Variable costs are the same as in the OEM market.

Goodweek intends to raise prices of its product in both markets at 5

percent every year as it expects the same increase in variable costs. In
addition, the Super Tread project will incur Rs. 25 million in marketing
and general administration costs during the first year. This cost is
expected to increase at 4 percent in the subsequent years.

Goodweek's corporate tax rate is 25 percent. The company uses a 16

percent discount rate to evaluate new product decisions. Automotive
industry analysts expect automobile manufacturers to produce 20,000
new cars this year and production to grow at 2.5 percent per year
thereafter. Each new car needs four tires (the spare tires are undersized
and are in a different category). Goodweek expects the Super Tread to
capture 11 percent of the OEM market. Industry analysts estimate that
the replacement tire market size will be 140,000 tires this year and that
it will grow at 2 percent annually. Goodweek expects the Super Tread to
capture an 8 percent of this market share. The appropriate depreciation
schedule is as per SLM. The immediate initial working capital
requirement is Rs. 11 million. Thereafter, the net working capital
requirements will be 15 percent of next year's sales. Except for the
initial investment that will occur immediately, assume all cash flows will
occur at year-end.
Required:
Based on net present value analysis, recommend whether investing in
the project is worth taking.

12. GS Mills Ltd. is considering setting up a new unit. The following

data has been compiled by the company for the purpose of determining
the acceptability of the proposal for setting up the new unit:
i) Land:
a. Payment at the time of purchase (t = 0) Rs. 200,000
b. 1 st , 2nd & 3rd installments at the end of next 3 following years Rs.
100,000 each
ii) Factory Buildings (Total Rs. 2,000,000):
a. Initial payment on signing of contract Rs. 200,000
b. Payment at the end of 2nd year Rs. 1,000,000
c. Balance payment at the end of 3rd year Rs. 800,000
iii) Plant, Machinery & Equipment:
a. Payment at the beginning of 4th year Rs. 1,500,000 and
b. Payment at the beginning of 5th year Rs. 500,000
iv) Extra margin for working capital (at the end of 5th year): Rs. 400,000
v) Operations will begin in the 6th year and will continue for 10 years up
to 15th year. Revenue and costs are assumed to be incurred at the end of
each year.
vi) Buildings and Plant, Machinery & Equipment will be depreciated @
5% and @ 10% respectively on SLM over the 10 years of operation.
vii) Buildings are expected to be sold for Rs. 600,000 and land for Rs.
800,000 at the end. viii) Plant, Machinery & Equipment will have a
salvage value of Rs. 200,000.
ix) Cost of Capital is 12%.
x) Other operation related data are:
a. Annual sales: Rs. 3,000,000,
b. Variable costs of operation: Rs. 1,200,000,
c. Fixed Costs (excluding depreciation): Rs. 800,000
d. Tax rate: 50%
xi) It is assumed that profit or loss on sale of assets at the end has no tax
effect. Required: 20 marks Advise whether the company should accept
the project on the basis of NPV and IRR of the project.

13. A company engaged in manufacture of household electrical goods

has taken a strategic decision to diversify operations and to make a
major investment in facilities for the manufacture of office equipment.
The new investment is being appraised over a four-year time horizon.
The company's finance director has prepared a revenue forecast. She
predicts that it will generate Rs. 2 million operating cash flows before
marketing costs in Year 1, Rs. 14.50 million in Year 2, Rs. 15.50 million in
Year 3 and Rs. 15.80 million in year 4. Marketing costs are predicted to
be Rs. 9 million in Year 1 and Rs. 2 million in each of Years 2 to 4.

The new investment will require immediate expenditure on facilities of

Rs. 30.60 million. Tax allowable depreciation will be available on the
new investment at an annual rate of 25% reducing balance basis. It can
be assumed that there will either be a balancing allowance or charge in
the final year of the appraisal. The finance director believes that the
facilities will remain viable after four years, and therefore a realisable
value of Rs. 13.50 million can be assumed at the end of the appraisal
period.

The new facilities will also require an immediate initial investment in

working capital of Rs. 3 million. Working capital requirements will
increase every year by 5% for the next three years and any working
capital at the start of Year 4 will be assumed to be released at the end of
the appraisal period.

The company pays tax at an annual rate of 30%. Tax is payable with a
year‘s time delay. Any tax losses on the investment can be assumed to be
carried forward and written off against future profits from the
investment.

The company has been considering following two choices for financing
all of the Rs. 30.60 million needed for the initial investment in the
facilities:

Option1: Obtaining subsidised loan from a government loan scheme,

with the loan repayable at the end of the fourth year. Issue costs of 4% of
the gross finance would be payable. Interest would be payable at a rate
of 30 basis points below the risk free rate of 2.5%. In order to obtain the
benefits of the loan scheme, the company would have to fulfill various
conditions, including locating the facilities in a remote part of country
where unemployment is high. Issue costs for the subsidised loan would
be paid out of available cash reserves. Issue costs are not allowable as a
tax-deductible expense.

Option 2: Issuing loan notes with interest payable at 5%, which is

company's normal cost of borrowing.
In initial discussions, the majority of the board of directors favoured
using the subsidised loan. However, the chairman argued strongly in
favour of the loan notes, as, in his view, operating costs will be lower if
the company does not have to fulfill the conditions laid down by the
government. The company's finance director is sceptical, however, about
whether the other shareholders would approve the issue of loan notes
on the terms suggested. The directors will decide which method of
finance to use at the next board meeting. Assume the discount rate to be
9% to calculate present value of the cash flows.
Required:
Calculate the adjusted net present value for the investment on the basis
that it is financed by the subsidized loan and conclude whether the
project should be accepted or not. Show all relevant calculations.

14. Ganesh Enterprises needs someone to supply it with 150,000

cartons of machine screws per year to support its manufacturing needs
over the next five years, and you‘ve decided to bid on the contract. It will
cost you Rs. 780,000 to install the equipment necessary to start
production; you‘ll depreciate this cost straight-line to zero over the
project‘s life. You estimate that in five years this equipment can be
salvaged for Rs. 50,000. Your fixed production costs will be Rs. 240,000
per year, and your variable production costs will be Rs. 8.50 per carton.
You also need an initial investment in net working capital of Rs. 75,000.
Your tax rate is 35 percent and you require a 16 percent return on your
investment.
Required:
Calculate unit bid price you should submit.

15. Consider the situation of a company, BIKE WASH, which must decide
whether to replace an existing machine. BIKE WASH currently pays no
taxes. The replacement machine costs Rs. 9,000 now and requires
maintenance of Rs. 1,000 at the end of every year for eight years. At the
end of eight years, the machine would be sold for Rs. 2,000 after taxes.
The existing machine requires increasing amounts of maintenance each
year, and its salvage value falls each year as below:

Year Maintenance(Rs) After tax salvage value(Rs)

Present 0 3000
1 1000 2500
2 2000 1500
3 3000 1000
4 4000 0

The existing machine can be sold for Rs. 3,000 now after taxes. If it is
sold one year from now, the resale price will be Rs. 2,500 after taxes, and
Rs. 1,000 must be spent on maintenance during the year to keep it
running. Assume that this maintenance fee is paid at the end of the year.
The machine will last for four more years before it falls apart with zero
salvage value at the end of year 4. BIKE WASH faces an opportunity cost
of capital of 15 percent.

Required:
Determine when BIKE WASH should replace the machine.