A machine was purchases 10 years ago at a cost of RM15000. The expected life of the machine was 15 years. Its salvage value was and is still zero. The machine is depreciated using the straight-line basis. A new machine can be purchased for RM24000, which will result in cost savings for the firm of RM6000 per annum over the 5 year useful life. The new machine can be sold for RM4000 in 5 years time. The old machines market value is RM2000, which is below its RM5000 book value. If the new machine is purchased, the existing one will be sold immediately. The tax rate is 28%. Net working capital requirements will increase by RM2000 at the time of replacement. The new machine falls into the 3 - year MACRS class ( Depreciation in Year 1 33%; Year 2 45%; Year 3 15%; and, Year 4 -7% on costs). The cost of capital is 12%. Determine the NPV of the replacement decision.
A machine was purchases 10 years ago at a cost of RM15000. The expected life of the machine was 15 years. Its salvage value was and is still zero. The machine is depreciated using the straight-line basis. A new machine can be purchased for RM24000, which will result in cost savings for the firm of RM6000 per annum over the 5 year useful life. The new machine can be sold for RM4000 in 5 years time. The old machines market value is RM2000, which is below its RM5000 book value. If the new machine is purchased, the existing one will be sold immediately. The tax rate is 28%. Net working capital requirements will increase by RM2000 at the time of replacement. The new machine falls into the 3 - year MACRS class ( Depreciation in Year 1 33%; Year 2 45%; Year 3 15%; and, Year 4 -7% on costs). The cost of capital is 12%. Determine the NPV of the replacement decision.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A machine was purchases 10 years ago at a cost
of RM15000. The expected life of the machine
was 15 years. Its salvage value was and is still
zero. The machine is depreciated using the
straight-line basis. A new machine can be
purchased for RM24000, which will result in cost
savings for the firm of RM6000 per annum over
the 5 year useful life. The new machine can be
sold for RM4000 in 5 years time. The old
machines market value is RM2000, which is
below its RM5000 book value. If the new
machine is purchased, the existing one will be
sold immediately. The tax rate is 28%. Net
working capital requirements will increase by
RM2000 at the time of replacement. The new
machine falls into the 3 - year MACRS class (
Depreciation in Year 1 33%; Year 2 45%; Year
3 15%; and, Year 4 -7% on costs). The cost of
capital is 12%.
Determine the NPV of the replacement decision.
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