CSY Bhd is a producer of dairy products. The company management decides to replace its equipment. The current equipment was purchased 18 years ago at a cost of RM 2 million, and it was amortized over a 20-year period using the straight-line method, assuming no expected residual value. Management believes that, currently, the equipment could be sold for RM 150,000. The new equipment would cost RM 2.85 million and have an expected residual value of RM 525,000 at the end of its estimated life of 10 years. With the new equipment, the current operating costs of RM 1.5 million would decrease by 30% in year 1, remain at that level for year 2 and 3, decrease by another 10% in year 4, and remain at the level for the remaining life of the asset. With the new equipment, the company would have to hire another operator at an annual cost of RM 30,000. The company’s cost of capital is 12%. (ii) Calculate the total new savings in operating costs over the expected life of the new equipment.
CSY Bhd is a producer of dairy products. The company management decides to replace its equipment. The current equipment was purchased 18 years ago at a cost of RM 2 million, and it was amortized over a 20-year period using the straight-line method, assuming no expected residual value. Management believes that, currently, the equipment could be sold for RM 150,000.
The new equipment would cost RM 2.85 million and have an expected residual value of RM 525,000 at the end of its estimated life of 10 years. With the new equipment, the current operating costs of RM 1.5 million would decrease by 30% in year 1, remain at that level for year 2 and 3, decrease by another 10% in year 4, and remain at the level for the remaining life of the asset. With the new equipment, the company would have to hire another operator at an annual cost of RM 30,000. The company’s cost of capital is 12%.
(ii) Calculate the total new savings in operating costs over the expected life of the new equipment.
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