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NEED TO FIGURE OUT THE TAX RATE BY OURSELF Madden Limited is a producer of dairy products. The company needs to replace its equipment The
NEED TO FIGURE OUT THE TAX RATE BY OURSELF
Madden Limited is a producer of dairy products. The company needs to replace its equipment The current equipment was purchased 18 years ago at a cost of RM2.0 million, and it was amortized over a 20-year period using the straight-line method, assuming no expected residual value. Management believes that currently, the equipment could be sold for RM150,000 The new equipment would cost RM2.85 million and have an expected residual value of RM525, 000 at the end of its estimated life of 10 years. With the new equipment, the current operating costs of RM1.5 million would decrease by 30% in year 1, remain at that level for year 2 and 3, decrease by another 10% in year 4, and remain at that level for the remaining life of the asset With the new equipment, the company would have to hire another operator atan annual cost Of RM30,000. The company's cost of capital is 12%. a) Assuming that the company decides to buy the new equipment now, calculate the initial investment b) Calculate the total net savings in operating costs over the expected life of the new equipment c) Calculate the net present value of investing in the new equipment d) If the maximum acceptable payback period for the company is 8 years, should the company replace the equipment now? Explain your rationale with supporting calculations. Madden Limited is a producer of dairy products. The company needs to replace its equipment The current equipment was purchased 18 years ago at a cost of RM2.0 million, and it was amortized over a 20-year period using the straight-line method, assuming no expected residual value. Management believes that currently, the equipment could be sold for RM150,000 The new equipment would cost RM2.85 million and have an expected residual value of RM525, 000 at the end of its estimated life of 10 years. With the new equipment, the current operating costs of RM1.5 million would decrease by 30% in year 1, remain at that level for year 2 and 3, decrease by another 10% in year 4, and remain at that level for the remaining life of the asset With the new equipment, the company would have to hire another operator atan annual cost Of RM30,000. The company's cost of capital is 12%. a) Assuming that the company decides to buy the new equipment now, calculate the initial investment b) Calculate the total net savings in operating costs over the expected life of the new equipment c) Calculate the net present value of investing in the new equipment d) If the maximum acceptable payback period for the company is 8 years, should the company replace the equipment now? Explain your rationale with supporting calculationsStep by Step Solution
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