Nico’s wife is the Chief Financial Officer of Tangshang Industries. Nico’s wife was assigned to evaluate the acquisition of a new petroleum-refining machine (Model XL elite) to replace an old petroleum-refining machine (Model basic) who was acquired 3 years ago. (Refer to tables 12-11 and 12-12 of the presentation).

The cost information of the machine is as follows:

                                                            Model XL elite                        Model Baisc

Acquisition Cost                                 4,500,000                                3,000,000

Installation Costs                                   400,000                                   300,000

The operational costs of the model basic were 850,000 annually and 500,000 annually for the model XL elite.

The old machine (Model basic) will be sold at $2,500,000. Tangshang Industries is in the 37.5% marginal tax rate and the cost of capital is 12%

a. What is the book value of the old Model Basic

b. What is the Capital Gain/ (loss) on the sale of the old Model Basic?

c. What is the tax benefit/(obligation) from the sale  

d. What is the cash inflow from the sale of the old Model Basic?

e. What is the net cost of the new Model XL elite?

f. Compute the present value of the total annual benefits.

g. Should the replacement be undertaken?