Question
The indh Corporation is using a machine that originally cost RM88,000.00. The machine is being depreciated by the straight-line method over 8 years and has
The indh Corporation is using a machine that originally cost RM88,000.00. The machine is being depreciated by the straight-line method over 8 years and has 4 years of depreciation remaining. The machine has a book value of RM44,000.00 and a current market value of RM40,000.00. lili , the Chief Financial Officer of indh, is considering replacing this machine with a newer model costing RM75,000. The new machine will save RM5,000 in after-tax earnings each year for the next six years. The new machine will be depreciated using straight line method. indh Corporation is in the 28% tax bracket and has a 10 percent cost of capital. REQUIRED: a. Calculate the cash inflows from the sale of the old machine. b. Calculate the net cost of the new machine. c. Calculate the incremental depreciation on the new versus the old machine. d. Determine the net present value of the new machine. Should they purchase the new machine? e. The NPV rule states that, An investment should be accepted if the net present value [NPV] is positive and rejected if it is negative. What does an NPV of zero mean? If you were a decision-maker faced with a project with a zero NPV (or very close to zero) what would you do? Why?
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