Tassie Ltd is considering replacing an old management system with a new one. Use the following information to determine the feasibility of this replacement plan.

 

Costs of new system: ……………………………………………………………….. $80,000

Costs of old system: ………………………………………………………………… $95,000

Depreciations of new system: …………………………………….. Prime-cost to zero

Depreciations of old system: ………………………………………….. $5,000 per year

Life of old system: ……………. will be written off in 5 years if no replacement

Life of new system: ………………………………………………………………….. 5 years

Salvage value of new system at the end of its life: ………………………. $18,000

Salvage value of old system at the end of its life: ………………………………… $0

Market value of the old system now: …………………………………………. $55,000

Total savings from the new system: ………………………………. $10,000 per year

Effective corporate tax rate: …………………………………………………………… 26%

Capital structure of Tassie: ……………………………… 60% debt and 40% equity

Beta: ……………………………………………………………………………………………… 1.5

Historical market risk premium: ……………………………………………………. 7.9%

Treasury yield: ………………………………………………………………………………. 5%

Corporate bond yield: …………………………………………………………………….. 8%

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