Question 2 Jacksons Ltd is deciding whether to replace and upgrade their metal- press. They have been advised that the new one would cost $560,000 and have an estimated useful life of 5 years. Their existing press has a current book value of $120,000 and can be sold for $95,000 today. The cash operating costs of the old press are $155,000 a year. The new, more efficient, press has annual operating costs of only $60,000 because it requires less workers to operate it. The old press is being depreciated at $24,000 a year and has a remaining life of five years at which time its scrap value will be zero. The new press will be depreciated on a straight-line basis over a 5 year life and is expected to be sold for $150,000 at the end of 5 years. The ATO have advised for tax purposes the machine should be depreciated to zero over its 5 year life. If the tax rate is 30% and the discount rate is 13.5%, should Jacksons Ltd buy the new press?Initial Cash flow New press Sale of old press Tax effect on sale of old press [120,000 95,000) " 0.3 Cash flows over life [5 years) Reduced operating costs (155,000 60,000) Tax [95,000 "' 0.3} Tax savings from depreciation (112,000 - 24,000) ' 0.3 m Salvage value of new press Tax effect on salvage of new press (0 - 150,000) "' 0.3