d) Which alternative should be the best choice for Ir. Shahrim? 3 Marks) 12 QUES

Question

d) Which alternative should be the best choice for Ir. Shahrim? 3 Marks) 12 QUESTION 4 100 Mahkota Engineering Sdn. Bhd., in the 20% of a new piece of Machinery that will yietd benefits of RM200,000 for year 1, RM300,000 tax bracket, is considering the purchase 2, RM400,000 for year 3, RM400,000 Dr year 4, and RM400,000 for year s MACPS The Machinery is to be depreciated using the Modified Accelerated Cost Recovery System MACRS) with three year recovery period (3-year property for Personal Property: Half Year Convention) The company believes the machinerý can be sold at the end of five (5) years of use for 20% gf the original purchase price, x. What is the maximum purchase cost, rate of return he company can pay if it requires a 20% aftertax (23 Marks)

Explanation / Answer

Let the purchase cost be X

So the depreciation expense and tax shield for :

Year1. 0.3336x 0.0667x

Year 2. 0.4445x 0.0889x

Year 3. 0.1481x 0.02962x

Year 4 0.0741x 0.01482x

Cash Flows after tax 160000, 240000, 320000, 320000, 320000 $ for years 1- 5 respectively.

Resale value at the end of 5th year = 0.20x

NPV = 0= X -[ present value of depreciation + present value of benefits + present value if capital gain]

0= X - [ 0.14804x + 768106.99]

0.85196x= 768106.99$

X= 901576.35$

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