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Bonnie is considering the replacement of its existing machine with a new model. The old machine has two years of its original economic life remaining
Bonnie is considering the replacement of its existing machine with a new model. The old machine has two years of its original economic life remaining and you have been asked to assess whether the replacement should take place now or in two years' time. The after-tax required rate of return on either machine is 12% per annum and the corporate tax rate is 30%. Both machines are depreciable for the tax purposes at 20% per annum (straight-line method). The relevant estimates are listed below. You are tasks to advise Bonnie and her executive team on the following issues: i) What are the net present value and the internal rate of return for the new machine? [4 marks ] ii) What are the net present value and the internal rate of return for the new machine if it is replaced (i) now or (ii) after 2 years from now. [6 marks ] iii) Should Bonnie continue using the old machine or sell it now in order to buy a new machine? Justify your advice. [4 marks ]
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