MTE mechanical engineering Company has a machine purchased 5 years ago at a cost of BDT 100000.00. Themachine had an expected duration of 10 years at that time. It had no salvage value and was depreciated on a straight-line method. Therefore, its annual depreciation charge was BDT 10000.00 and its present book valueis BDT 30000.00. The financial manager of the company is thinking to purchase a new machine costing BDT 150000.00 including freight and installation charges. The duration life of the new machine is 5 years with a salvage value of BDT 25000.00. The new machine will save BDT 40000.00 per year. If the new machine is purchased, the old one can be sold for BDT 15000.00. The corporate tax rate is 40% and the cost of capital is 12 %. Purchasing a new machine would require Tk. 15000.00as working capital at the beginning of the year which could be realized at the end of the 5th year. The new machine will be depreciated on a straight-line basis. Using the NPV method determined should the old be replaced?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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QUESTION-03
MTE mechanical engineering Company has a machine purchased 5 years ago at a cost of BDT
100000.00. Themachine had an expected duration of 10 years at that time. It had no salvage value and
was depreciated on a straight-line method. Therefore, its annual depreciation charge was BDT 10000.00
and its present book valueis BDT 30000.00. The financial manager of the company is thinking to
purchase a new machine costing BDT 150000.00 including freight and installation charges. The
duration life of the new machine is 5 years with a salvage value of BDT 25000.00. The new machine will
save BDT 40000.00 per year. If the new machine is purchased, the old one can be sold for BDT
15000.00.
The corporate tax rate is 40% and the cost of capital is 12 %. Purchasing a new machine would require
Tk. 15000.00as working capital at the beginning of the year which could be realized at the end of the
5th year. The new machine will be depreciated on a straight-line basis. Using the NPV method
determined should the old be replaced?
Transcribed Image Text:QUESTION-03 MTE mechanical engineering Company has a machine purchased 5 years ago at a cost of BDT 100000.00. Themachine had an expected duration of 10 years at that time. It had no salvage value and was depreciated on a straight-line method. Therefore, its annual depreciation charge was BDT 10000.00 and its present book valueis BDT 30000.00. The financial manager of the company is thinking to purchase a new machine costing BDT 150000.00 including freight and installation charges. The duration life of the new machine is 5 years with a salvage value of BDT 25000.00. The new machine will save BDT 40000.00 per year. If the new machine is purchased, the old one can be sold for BDT 15000.00. The corporate tax rate is 40% and the cost of capital is 12 %. Purchasing a new machine would require Tk. 15000.00as working capital at the beginning of the year which could be realized at the end of the 5th year. The new machine will be depreciated on a straight-line basis. Using the NPV method determined should the old be replaced?
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