Scenario 2: Crotekch Power Sdn. Bhd. installed a diesel-electric unit costing RM50,000 at a remote site because no dependable electric power was available from a public utility five years ago. The company has computed the depreciation by straight-line method with a useful life of 10 years and a zero-salvage value. Annual operation and maintenance expenses are RM16,000 and property taxes and insurance cost another RM3,000 per year. Dependable electric service is now available at an estimated annual cost of RM30,000. The company wishes to know whether it would be more economical to dispose of the diesel-electric unit now, when it can be sold for RM35,000, or to wait five years when the unit would have to be replace anyway (with no Market Value). The company has an effective income tax rate of 50% and tries to limit its capital expenditures to opportunities that will earn at least 15% per year after income tax. What would you recommend?
Scenario 2: Crotekch Power Sdn. Bhd. installed a diesel-electric unit costing RM50,000 at a remote site because no dependable electric power was available from a public utility five years ago. The company has computed the depreciation by straight-line method with a useful life of 10 years and a zero-salvage value. Annual operation and maintenance expenses are RM16,000 and property taxes and insurance cost another RM3,000 per year. Dependable electric service is now available at an estimated annual cost of RM30,000. The company wishes to know whether it would be more economical to dispose of the diesel-electric unit now, when it can be sold for RM35,000, or to wait five years when the unit would have to be replace anyway (with no Market Value). The company has an effective income tax rate of 50% and tries to limit its capital expenditures to opportunities that will earn at least 15% per year after income tax. What would you recommend?
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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Transcribed Image Text:Scenario 2:
Crotekch Power Sdn. Bhd. installed a diesel-electric unit costing RM50,000 at a remote
site because no dependable electric power was available from a public utility five years
ago. The company has computed the depreciation by straight-line method with a useful
life of 10 years and a zero-salvage value. Annual operation and maintenance expenses
are RM16,000 and property taxes and insurance cost another RM3,000 per year.
Dependable electric service is now available at an estimated annual cost of RM30,000.
The company wishes to know whether it would be more economical to dispose of the
diesel-electric unit now, when it can be sold for RM35,000, or to wait five years when the
unit would have to be replace anyway (with no Market Value). The company has an
effective income tax rate of 50% and tries to limit its capital expenditures to opportunities
that will earn at least 15% per year after income tax. What would you recommend?
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