PGR Berhad, a manufacturer of plastic products, is considering replacing a 5 year old manual moulding machine with a new automated machine. The replacement can save production costs by RM51,000 per year. The present and the expected situation resulting from the replacement are given below:

Present MachineNew Machine

Total expected useful life10 years5 years

Cost of machineRM100,000RM145,000

Expected resale value

5 years from nowRM0RM37,000

Resale value nowRM12,500-

Depreciation charge per year

(straight - line method)RM10,000RM29,000

Investment tax credit-10% on cost

The company's tax rate is 40% and tax is paid in the year it is incurred. The capital allowance is equal to the depreciation charged. Investment tax credit is claimed in the year of investment.