Question 1 a) Taman Consolidated Bhd is planning for the replacement of a fully depreciated machine that has a remaining useful life of 10 years, with a newer version, which is more sophisticated. The newer version of the machine will cost $200,000. It will also require $30,000 in installation costs. It will be depreciated under MACRS using a 5 year recovery period as per the following table: There is a $25,000 increase in net working capital which will be required to support the new machine. The firm's managers have decided to evaluate the potential replacement over a 4 year period. They have also estimated that the old machine can be sold at the end of 4 years for net $15,000 before taxes; the new machine will be worth $75,000, at the end of 4 years before taxes. You are required to calculate the terminal cash flow at the end of year 4 which is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate. (15 marks) b) Vascan Bhd., spent $4,500 in researching and development activities of a new project. New machinery worth $20,000 is needed for this project, which also would incur an installation cost of $3,000. Upon the sale of the old machine the company would realize $4,500 in after-tax proceeds. If Vascan's working capital is not affected by this project, calculate the initial investment amount for this project? (5 marks) Question 1 a) Taman Consolidated Bhd is planning for the replacement of a fully depreciated machine that has a remaining useful life of 10 years, with a newer version, which is more sophisticated. The newer version of the machine will cost $200,000. It will also require $30,000 in installation costs. It will be depreciated under MACRS using a 5 year recovery period as per the following table: There is a $25,000 increase in net working capital which will be required to support the new machine. The firm's managers have decided to evaluate the potential replacement over a 4 year period. They have also estimated that the old machine can be sold at the end of 4 years for net $15,000 before taxes; the new machine will be worth $75,000, at the end of 4 years before taxes. You are required to calculate the terminal cash flow at the end of year 4 which is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate. (15 marks) b) Vascan Bhd., spent $4,500 in researching and development activities of a new project. New machinery worth $20,000 is needed for this project, which also would incur an installation cost of $3,000. Upon the sale of the old machine the company would realize $4,500 in after-tax proceeds. If Vascan's working capital is not affected by this project, calculate the initial investment amount for this project
