The KFUPM bookstore has a copier machine that was purchased 2 years... The KFUPM bookstore has a copier machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. It was originally bought for SAR 2,633 and it could be sold for SAR 500 at the end of its useful life. If sold now, the machine could be sold at a market value of SAR 2,500.

The bookstore found another copier machine that has a cost of SAR 8,000, an estimated useful life of 6 years, and an estimated salvage value of SAR 800. The new machine would permit an output expansion, so sales would rise by SAR 1,000 per year. Even so, the new machine's greater efficiency would cause operating expenses to decline by SAR 1,500 per year. The new machine would require that inventories and account payables increase immediately by SAR 2,000 and SAR 500 each year, respectively. At the end of the new machine's life, the bookstore will be able to recover 100% of its investment in inventories and account payables. The bookstore's tax rate is 40%, and its WACC is 15%. The bookstore will depreciate the new machine using the accelerated depreciation. The depreciation rates used are as follows:

Period

year1

year2

year3

year4

year5

year6

Depreciation rate

20%

32%

19%

12%

11%

6%

(USING EXCEL)

Input Data applicable to both machines: WACC for the analysis Tax rate \begin{tabular}{|l|} \hline 15% \\ \hline 40% \\ \hline \end{tabular} Data for old machine: Original life Original Price of old machine Effective Life Current market value If not replaced, it can be sold at the end of its life (salvage value) \begin{tabular}{|c|} \hline 8 \\ \hline 2,633 \\ \hline 6 \\ \hline 2,500 \\ \hline 500 \\ \hline \end{tabular} straight line dep 329.13 Data for new machine: Cost life of machine salvage value Sales will rise per year by decline in operating expenses per year by Increase in Inventories Increase in A/P Depreciation rates \begin{tabular}{cccccc} Year1 & Year2 & Year3 & Year4 & Year5 & Year6 \\ \hline 20% & 32% & 19% & 12% & 11% & 6% \\ \hline \multicolumn{1}{l}{} & & & \\ \hline \end{tabular} CEsfrom NOWC Initial Outlay (10) \begin{tabular}{|l|l|l|l|l|} \hlineN/A & & & & \\ \hline \end{tabular} TCF salvagevalue Bookvalue taxableor saving amount =Salvage BV Tax payment ssavingl IGF Prolected FCF Years New Machine Year0 Year1 Year2 Year3 Year 4 Year 5 Year 6 ATCF Sales Cost except depreciation Gross Profit NOPAT+Den NOWC Inventories A/P NOWC change NOWC CEfrom NOWC Initial Outlay (10) Cost of Project salvagevalueold machine BV old machine = dep base Acc dep. taxable or saving amount = Salvage BV ID TCF Salvagevalue BV = dep base Acc dep taxableor saving amount =Salvage BV Tax payment savingl TGE=Salvarae-taxnavment (savinaL