Reference no: EM132952043
Question - 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 cash flow
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.
Required - What is the terminal cash flow amount associated with this decision?
a. $12,000
b. $10,800
c. $12,200
d. None of above
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