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replacement plan, calculate: i) Payback period

replacement plan, calculate: i) Payback period

Essentials Of Investments
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
Problem 1PS
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Currently, this company is considering replacing an existing machine used in production that was purchased 5 years ago for RM125, 000 with a new computer system that could improve the company's operations. The old machine is being depreciated under straight line method over its useful life of 10 years with no salvage value. Its current market value is RM5, 000. Chief Financial Officer for this company, Mr Abraham Teo has reviewing two (2) options: Machine TKC imported from China and Machine RMR imported from Japan. Below is the information provided for the new machine. Machine TKC Machine RMR Cost of Asset RM200,000 RM150,000 RM12,000 Freight and transportation RM10,000 cost Installation cost RM5,000 RM3,000 RM8,000 Renovation cost (before installation of the machine) RM5,000 Training cost (to operate the NA RM5,000 machine) Depreciation method Salvage value Straight line RM10,000 Straight line RM8,000 5 years Useful life 5 years
Transcribed Image Text:Currently, this company is considering replacing an existing machine used in production that was purchased 5 years ago for RM125, 000 with a new computer system that could improve the company's operations. The old machine is being depreciated under straight line method over its useful life of 10 years with no salvage value. Its current market value is RM5, 000. Chief Financial Officer for this company, Mr Abraham Teo has reviewing two (2) options: Machine TKC imported from China and Machine RMR imported from Japan. Below is the information provided for the new machine. Machine TKC Machine RMR Cost of Asset RM200,000 RM150,000 RM12,000 Freight and transportation RM10,000 cost Installation cost RM5,000 RM3,000 RM8,000 Renovation cost (before installation of the machine) RM5,000 Training cost (to operate the NA RM5,000 machine) Depreciation method Salvage value Straight line RM10,000 Straight line RM8,000 5 years Useful life 5 years
The replacement of old machine will result the following changes: Old machine Machine TKC Machine RMR Annual sales RM500,000 Increase by 20% Decrease by 5% Increase by 2.5% Decrease by 1.5% Increase by 35% Decrease by 3% Annual cost of defects RM80,000 Annual operating cost Quarterly maintenance RM50,000 Increase by 4% RM10,000 Increase by 2% cost Initial investment in Net working capital NA RM30,000 RM20,000 Assume that the company's cost of capital and tax rate is 10% and 40% respectively. From the replacement plan, calculate: i) Payback period
Transcribed Image Text:The replacement of old machine will result the following changes: Old machine Machine TKC Machine RMR Annual sales RM500,000 Increase by 20% Decrease by 5% Increase by 2.5% Decrease by 1.5% Increase by 35% Decrease by 3% Annual cost of defects RM80,000 Annual operating cost Quarterly maintenance RM50,000 Increase by 4% RM10,000 Increase by 2% cost Initial investment in Net working capital NA RM30,000 RM20,000 Assume that the company's cost of capital and tax rate is 10% and 40% respectively. From the replacement plan, calculate: i) Payback period
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