Reference no: EM133094079
Question - Rapunzel factory has decided to replace the existing machine with a new one that has constantly broke down. The current machine initial cost was RM500,000, bought 4 years ago with a salvage value of RM40,000. Its expected remaining useful life is four years. This machine can be sold now for RM80,000.
The purchase price for the new machine is RM400,000. In addition, the company will have to bear the transportation and installation costs of RM8,000 and RM12,000 respectively. This machine is expected to have 4 years useful life and RM50,000 salvage value.
The new machine is expected to generate annual savings in operational cost for RM30,000. The company adopts the straight-line method of depreciation. The current tax rate applicable is 25% and cost of capital is 10 percent. To determine the benefits of this asset's replacement to the company, you are required to do the followings:
Required - Calculate the net initial outlay, differential after-tax cash flows and the terminal cash flow.
Using the net present value method, calculate the relevant cash flows.
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