Nico\'s wife is the Chief Financial Officer of Tangshang Industries. Nico\'s wif

Question

Nico's wife is the Chief Financial Officer of Tangshang Industries. Nico's wife was assigned to evaluate the acquisition of a new petroleum- refining machine (Model XL elite) to replace an old petroleum-refining machine (Model basic) who was acquired 3 years ago. (Refer to tables 12- 11 and 12-12 of the presentation) The cost information of the machine is as follows: Model XL elite Model Baisc Acquisition Cost Installation Costs 4,500,000 400,000 3,000,000 300,000 500,000 annually for the model XL elite. The old machine (Model basic) will be sold at $2,500,000. Tangshang Industries is in the 37.5% marginal tax rate and the cost of capital is 12% a. What is the book value of the old Model Basic b. What is the Capital Gain/ (loss) on the sale of the old Model Basic? c. What is the tax benefit/(obligation) from the sale d. What is the cash inflow from the sale of the old Model Basic? e. What is the net cost of the new Model XL elite? f. Compute the present value of the total annual benefits. g. Should the replacement be undertaken?

Explanation / Answer

(i) Year Opening book value Depreciation rate Depreciation Closing Book value 1 3300000 10% 330000 2970000 2 2970000 18% 594000 2376000 3 2376000 14.40% 475200 1900800 Book value of old machine = 1900800 (ii) Sale value of old machine 2500000 Less: Book value 1900800 Capital gain 599200 (iii) Tax obligation = Capital gain 599200 Tax rate 37.50% Tax payable 224700 (iv) Net cash flow from old machine Salvage value 2500000 Less; Tax obligation 224700 Net cash flow from old machine 2275300 (v) Cost of new machine 4500000 Installation cost 400000 Less: Net cash flow from old machine 2275300 Net cost of new machine 2624700 (vi) Savings in Operating cost (850000-500000) 350000 Annuity factor(12%,10) 7.4694 PV of annual savings 2614305.3 (vii) NPV - Year Depreciation rate Depreciation on old Depreciation on new Incremental depreciation Depreciiation tax savings(DTS) PV factor@ 12% PV of DTS 1 10.00% 380160 490000 109840 41190 0.892857 36776.79 2 18.00% 304260 882000 577740 216652.5 0.797194 172714 3 14.40% 243210 705600 462390 173396.3 0.71178 123420 4 11.52% 216150 564480 348330 130623.8 0.635518 83013.75 5 9.22% 216150 451780 235630 88361.25 0.567427 50138.55 6 7.37% 216150 361130 144980 54367.5 0.506631 27544.27 7 6.55% 216150 320950 104800 39300 0.452349 17777.32 8 6.55% 0 320950 320950 120356.3 0.403883 48609.87 9 6.55% 0 320950 320950 120356.3 0.36061 43401.67 10 6.55% 0 320950 320950 120356.3 0.321973 38751.49 642147.8 Cost of old 3300000 cost of new 4900000 Depreciation on old (4th year rate x cost) as it is 3 years old. PV of annual savings 2614305 PV of DTS 642147.8 Less: Net cost of new machine 2624700 NPV - 631753.1 New machine is viable as the NPV is postive Please provide feedback…. Thanks in advance…. :-)

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.