Question
A machine was purchases 10 years ago at a cost of RM15000.The expected life of the machine was 15 years.Its salvage value was and is
A machine was purchases 10 years ago at a cost of RM15000.The expected life of the machine was 15 years.Its salvage value was and is still zero.The machine is depreciated using the straight-line basis.A new machine can be purchased for RM24000, which will result in cost savings for the firm of RM6000 per annum over the 5 year useful life.The new machine can be sold for RM4000 in 5 years time.The old machine's market value is RM2000, which is below its RM5000 book value.If the new machine is purchased, the existing one will be sold immediately.The tax rate is 28%. Net working capital requirements will increase by RM2000 at the time of replacement.The new machine falls into the 3-year MACRS class (Depreciation in Year 1 - 33%; Year 2 - 45%; Year 3 - 15%; and, Year 4 - 7% on costs).The cost of capital is 12%.
Determine the NPV of the replacement decision.
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