CA Final MAFA Question Capital Budgeting

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Gufran Khan (Querist)
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02 June 2008 Hi , This is a question from Pg#66 Revision prob 7 of the PV Ram & SD Bala 2nd Edition Book . I am not satisfied with the solution given for the problem in the said book . The question is as follows :
A bottle manufacturer operates two machines each with capacity of producing 1000 bottles per annum . The Machines have an infinite life & no salvage value . The operating Expenses are Rs2 per Bottle . During the summer machines work to Full Capacity but during winter bacause of slack in demand they work only 50% capacity . The Co is thinking with the idea of replacing these machines with the two identical machines .Each machine would cost Rs 6000 and last indefinitly .The operating costs are Rs 1per bottle .What should company do ? Cost of Capital 10% .
Note : As per my analysis the the co should replace both the machines but the books answer is contrary . Please suggest me the correc answer .Also if any alternate solution exists pls guide .
Thanks in advance ,
Gufran Khan

CA supriyo saha

CA supriyo saha (Expert)
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02 June 2008 Average quantity produced by each of the original two machines= 1000+500/2=750 bottles.

so operating cost comes to 750*2=Rs 1500/-by one machine. hence 1500*2=3000/-
whereas in case of new machines,
cost comes to as follows:-
operating cost-1000/-per machine
total-1000*2=Rs 2000/-
so machines should be replaced with the newer one.
pl. state how book has solved so that i can assess it is right or wrong.

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