Math Problem Solver

A lathe used for the purpose of cutting molded plastics was acquired 10 years ago for a total

expenditure of RM7,500,000. At the time of acquisition, the machine was projected to have a lifespan

of 15 years, and the management's initial estimation, which remains unchanged, posited that the

residual value would be negligible upon the completion of the aforementioned 15-year period. The

machine is subject to depreciation using the straight-line method, resulting in an annual depreciation

expense of RM500,000. As a result, the current book value of the equipment stands at RM2,500,000.

According to the report provided by the R&D manager, there is a proposition to acquire a new machine

at a cost of RM16,180,000, which includes expenses for freight and installation. This machine is

projected to have a lifespan of five years and is expected to result in a reduction in both labor and raw

material consumption. Consequently, the annual operating costs are anticipated to decrease from

RM9,000,000 to RM4,000,000. The decrease in expenses will result in an increase in pre-tax profits of

RM9,000,000 - RM4,000,000 = RM5,000,000 annually.

According to estimates, the projected salvage value of the new equipment after a period of five years

is RM2,000,000. The present market worth of the old machine is RM1,000,000, which is lower than its

book value of RM2,500,000. In the event of acquiring the new machine, the decision has been made

to sell the old lathe to another company, rather than opting for an exchange with the new machine.

The marginal tax rate of the corporation is 40 percent, while the replacement project is characterized

by a risk level slightly below the average. The net operating working capital requirements will

experience an increase of RM1,000,000 upon replacement. The newly acquired machine is classified

under the 3-year Modified Accelerated Cost Recovery System (MACRS) class (33%; 45%; 15%; 7%).

Additionally, due to the relatively assured nature of the cash flows associated with the project, the

project's cost of capital is determined to be 11 percent, which is lower than the 12 percent typically

assigned to projects with average risk.

REQUIRED:

a. Should KSB proceed with the implementation of the replacement strategy?