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Topic 2 1. Sedamal Bhd. is considering the purchase of a new machine to replace an existing machine. The new machine costs RM260,000 with
Topic 2 1. Sedamal Bhd. is considering the purchase of a new machine to replace an existing machine. The new machine costs RM260,000 with an installation cost of RM20,000. Prior to the commencement of operation, the firm will have to send two employees for training on the operation of the new machine which costs RM5,000. The company estimates that the new machine will last for 6 years, with a salvage value of RM10,000 and will be depreciated using the straight-line method. Besides that, additional working capital of RM22,000 is needed to start the project. The old machine has zero salvage value with 6 years remaining life and is depreciated using the straight-line method. The machine was purchased 4 years ago for RM100,000 and can be sold today for RM65,000. The following is an additional information given for both machines: Sales (per year) Operating cost (per year) Maintenance cost (per year) Old Machine (RM) New Machine (RM) 200,000 350,000 200,000 250,000 350,000 250,000 The firm is subjected to a 28 percent corporate tax rate and its cost of capital is 12 percent. Determine: a) The Initial Outlay, Net Annual Cash Flows and Terminal Cash Flows b) The acceptability of the new machine using the NPV method (15 marks) (5 marks) 2. The S.S. Corporation is using a machine that originally costs RM188,000 which was brought 4 years ago. The machine has a remaining life of 6 years. It is being depreciated to zero salvage value using the straight-line method and has a current market value of RM60,000. The machine is operated by an operator who earns RM21,000 per year in salary. The CFO of S.S. Corporation is considering replacing this machine with newer model which has been introduced by a company in Korea.
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