Tassie Ltd is considering replacing an old management system with a new one. Use the following information to determine the feasibility of this replacement plan and explain your decision in detail. Costs of new system: $80,000 Costs of old system: $95,000 Depreciations of new system: Prime cost to zero Depreciations of old system: $5,000 per year Life of old system: will be written off in 5 years if no replacement Life of new system: 5 years Salvage value of new system at the end of its life: $18,000 Salvage value of old system at the end of its life: $0 Market value of the old system now: $55,000 Total savings from the new system: $10,000 per year Effective corporate tax rate: 26% Capital structure of Tassie: 60% debt and 40% equity Beta: 1.5 Historical market risk premium: 7.9% Treasury yield: 5% Corporate bond yield: 8%
Tassie Ltd is considering replacing an old management system with a new one. Use the following information to determine the feasibility of this replacement plan and explain your decision in detail.
Costs of new system: $80,000
Costs of old system: $95,000
Depreciations of old system: $5,000 per year
Life of old system: will be written off in 5 years if no replacement
Life of new system: 5 years
Salvage value of new system at the end of its life: $18,000
Salvage value of old system at the end of its life: $0
Market value of the old system now: $55,000
Total savings from the new system: $10,000 per year
Effective corporate tax rate: 26%
Capital structure of Tassie: 60% debt and 40% equity
Beta: 1.5
Historical market risk premium: 7.9%
Treasury yield: 5%
Corporate bond yield: 8%
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