Question 1:

Tassie Ltd is considering replacing an old management system with a new one. Use the

following information to determine the feasibility of this replacement plan and explain your

decision in detail.

Costs of new system: ..........................................................................$80,000

Costs of old system: ...........................................................................$95,000

Depreciations of new system: ............................................ Prime-cost to zero

Depreciations of old system: ..................................................$5,000 per year

Life of old system: ................ will be written off in 5 years if no replacement

Life of new system: ............................................................................. 5 years

Salvage value of new system at the end of its life: .............................$18,000

Salvage value of old system at the end of its life: .......................................$0

Market value of the old system now: .................................................$55,000

Total savings from the new system: .....................................$10,000 per year

Effective corporate tax rate: .................................................................... 26%

Capital structure of Tassie: .................................... 60% debt and 40% equity

Beta: ............................................................................................................1.5

Historical market risk premium: ............................................................. 7.9%

Treasury yield: ........................................................................................... 5%

Corporate bond yield: ................................................................................ 8%