REVIEW EXAMINATIONS 347 Question 6 (16 Marks) Grap Limited provides you wit subm
ID: 2789260 • Letter: R
Question
REVIEW EXAMINATIONS 347 Question 6 (16 Marks) Grap Limited provides you wit submitted to replace an existing computer system. hic e following data on which to evaluate a Existing Proposal Initial purchase cost Expected life End of life scrap value When purchased Depreciation rate 20 % on Prime Cost Current trade-in value Positive before tax cash flows per year Additional Information: $250000 $350000 5 Years 10,000$40,000 Two years agoNew today Years $100,000 N/A $75,000$105,000 (i) Company tax rate is 30% payable at the end ofthe income year. (i) Cost ofcapital is 10% after tax. Required: (a) Calculate the Ner Present Value of the existing system's future cash Hows (b) flows. Calculate the Net Present Value of the proposal's future cash proposal. Provide reasons.Explanation / Answer
Answer for question no.a:
Given the life of the machine is 7 years and it has already been used for 2 years and its current value is $100,000. to calculate NPV as of now, this is to be taken as intial capital outlay.
Also assumed that positive before tax cash flows is after depreciation expense and before considering the depreciation tax savings.
Answer for question no.a:
Answer for question no.b:
Answer for question no.c:
As the NPV in the case of new machine is positive, the proposal should be accepted.
Year Inflows(1) Tax @30%(2)=(1)*30% Tax savings on depreciation(3)=250000*20%*30% CashOutflows/After tax cash inflows(4)=(1)-(2)+(3) Present value factor(5) Present value(6)=(5)*(4) 0 -100000 1 -100000 1 75000 22500 15000 67500 0.90909 61363.6 2 75000 22500 15000 67500 0.82645 55785.1 3 75000 22500 15000 67500 0.75131 50713.7 4 75000 22500 52500 0.68301 35858.2 5 75000 22500 52500 0.62092 32598.4 5 Salvage value As it is totally depreciated, salvage value after tax is 10000*(1-.30) 6500 0.62092 4035.99 Total 140355Related Questions
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