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Hello sir, I’m kindly asking for your help on how to deal with salvage value of new machine in the question below when calculating for net present value (NPV)?
BMX Ltd. is considering the purchases of a new machine tool to replace an obsolete one. The machine being used has a tax book value of K17,000,000 and a market value of K13,000,000. The machine is being depreciated at a charge of K1,300,000 per year over its remaining useful life of 10 years to a K4,000,000 salvage value… The proposed machine will perform the operation so much more efficiently that BMX engineers estimate that labour and other direct costs will be reduced by K14,000,000 per year if it is installed. Further, sales are expected to increase by K5,000,000 per year. The new machine will cost K53,000,000 delivered and installed and has a useful life of 10 years with K3,000,000 salvage value. The company expects to earn 12 percent on its investments after tax. The tax rate is 35 percent and the company uses straight line depreciation.
Buying the new machine would give an inflow on disposal of 3,000,000 in 10 years time. However had they kept the existing machine, they would be receiving 4,000,000 in 10 years time.
Therefore when making the decision we would bring in net outflow of 1,000,000 in 10 years time.
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations
🙂I was thinking like we have to subtract tax from it, 3000000(1-t). My line of thought ????
Tax would apply to any balancing charge or allowance (as explained in my free lectures on investment appraisal with tax). However, since it is straight line depreciation (which is very unusual for the exam) there will not be a balancing charge or allowance.
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