Question

Subang Folding Box Berhad is considering purchasing a new gluing machine. The gluing machine costs RM50,000 and requires installation costs of RM2,500. This outlay would be partially offset by the sale of an existing gluer.

The existing gluer originally cost RM30,000 and is four years old. It is being depreciated under straight line method and can currently be sold for RM15,000. The existing gluer has a remaining useful life of two years. If held until year six, the existing machine's market value would be zero.

Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by RM17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of RM5,000 which should be included in the initial outlay. The new machine will be depreciated under straight line method and estimated disposal value is RM10,000. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains.

Required:

1. Calculate the initial cash outflow associated with replacing the older machine with the new one?                                                                                      

2. Calculate the net present value if the company decided to but the new gluing machine?

                                                                                                       

3. Should Subang Folding Box Berhad replace the old machine?

                                (1 Mark)

Answer 1

Calculate the initial cash outflow associated with replacing the older machine with the new one?

Initial Outlay = Cost of new machine - Salvage Value of old machine + Tax on Gain on salve of old machine + Training costs

Initial Outlay = $44500

Calculate the net present value if the company decided to but the new gluing machine?

NPV = $7433

Should Subang Folding Box Berhad replace the old machine?

Since the NPV is positive it is recommended to replace the old machine