Tassie Ltd is considering replacing an old management system with a new one. Use the following information
Question:
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%
[20 marks]
[Total marks Question 6: 20 marks]
Accounting
ISBN: 978-0324188004
21st Edition
Authors: Carl s. warren, James m. reeve, Philip e. fess