Question 1

Suci Industries is considering a new assembly line costing RM6,000,000. The assembly line will be fully depreciated using straight-line method over its 5 year depreciable life. Operating costs of the new machine are expected to be RM1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of RM3,000,000. If sold today the company would receive RM2,400,000 for the existing machine. Annual operating costs on the existing machine are RM2,100,000 per year. Suci Industries is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. Calculate the net present value of replacing the existing machine.