Question 3

MultiAlpha is considering replacing an old machine with a new one. Two months ago their chief engineer completed a training workshop on the new machines operation and efficiency. The cost of RM4000 cost for this workshop session has already been paid. If the new machine is purchased, it would require RM5000 in installation and modification costs to make it suitable for operation in the factory. The old machine originally cost RM90000 five years ago and is being depreciated by RM15000 per year. The new machine will cost RM80000 before installation and modification. It will be depreciated by RM5000 per year. The old machine can be sold today for RM10000. The marginal tax rate for the firm is 28%. Compute the relevant initial outlay in this capital budgeting decision. Suggested Solutions: RM73600

Initial Investment (Cash Outflow)		Remark
Y0	RM
Price of Equipment	80000
ADD:
Cost of Training	0	Sunk costs
Shipping costs	0
Modification costs	0
Installation	5000
Initial Outlay	85000
Less:
Cash Inflow Upon Sale of Existing Machine	(10000)
Tax Saving on Disposal of Existing Machine	(1400)
Net Cash Flow for Investment	73600

Sale of Existing Machine	RM	Cash Flow Upon Disposal Of Existing Machine
Cost Of Equipment	90000
Less: Accumulated Depreciation RM15000 x 5 years	(75000)
Book Value	15000
Disposal Price	10000	10000
Loss on Disposal	5000
Tax Saving 28%	1400	1400