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Mumias Milling Company purchased a grinder 3 years ago at a cost of Sh.3.5 million.The grinder had a life of 8 years at the time of purchase. It is being depreciated at 15%per year on a declining balance. The company is considering replacing it with a newgrinder costing Sh.7 million with an expected useful life of 5 years.Due to increased efficiency, the profit before depreciation is expected to increase bySh.400,000 a year. The old and new grinders will now be depreciated at 25% per year ona declining balance for tax purposes.The salvage value of the new grinder is estimated at Sh.210,000. The market value of theold grinder, today, is Sh.4 million. It is estimated to have a zero salvage value after 5years.The company's tax is 30% and the after tax cost of capital is 12%.RequiredShould the new grinder be bought? Explain.
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