Question

c) Bank ABC Berhad is considering replacing its existing computer system, which was purchased 2 years ago at a cost of RM325, 000. The system can be sold today for RM200, 000. It is being depreciated and 5-year recovery period. A new computer system will cost RM500, 000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate. Calculate the following;

1. The book value of the existing computer system.
2. the after-tax proceeds of its sale for RM200,000
3. The initial investment associated with the replacement project.

Answer 1

c)

i)  Recovery period of 5 given

Initial Coat = RM325,000

Using SLM depriciation methord, every year depriciation amount = 325000/5 = 65000

BV of existing system i.e value after 2 years of purchase will be = 325000-65000*2 = RM195,000

ii) Capital Gain from the sale of asset = RM5,000

Tax Rate = 40%

Tax deducted = 5000*40% = 2000

After tax proceeds of sale = 195,000+3,000 = RM198,000

iii) Initial investment for replacment of project = 500,000-198,000 = RM302,000