Reference no: EM132877349

ABC Corp is considering an asset replacement decision.The existing machine:

• was bought 2 years ago for $60,000
• economic life was 5 years when it was bought
• tax allowable depreciation is $12,000 p.a. for 5 years
• current market value of machine = $40,000
• expected salvage value of machine in 3 years time is $4,000

The new machine:

• would cost $150,000 (including purchase cost, shipping cost and installation cost)
• economic life is 3 years
• tax allowable depreciation is $70,000 p.a. for 2 years
• current market value of machine = $23,000
• expected salvage value in 3 years time is $10,000

Deciding to buy the new machine will:

• use the working capital of $5,000

Additional details:

• Before tax net operating cashflow
• old machine: $112,000 p.a. for 3 years
• new machine : $143,500 p.a. for 3 years
• Corporate tax rate = 30%
• Assumed discount rate = 5% p.a.

Problem 1: What is the terminal cash flow amount associated with this decision?

a. $12,000

b. $10,800

c. $12,200

d. None of above