QUESTION 4 (25 MARKS)

a) If depreciation is not a cash flow item, why does it affect the level of cash flows from a project in any way? (6 marks)

b) There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset. Describe the four ways and the tax impact. (8 marks)

c) Bank ABC Berhad is considering replacing its existing computer system, which was purchased 2 years ago at a cost of RM325,000. The system can be sold today for RM200,000. It is being depreciated and 5-year recovery period. A new computer system will cost RM500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate.

Calculate the following;

i) the book value of the existing computer system. (3 marks)

ii) the after-tax proceeds of its sale for RM200,000 (4 marks) iii) the initial investment associated with the replacement project. (4 marks)