Olympic Industries is moving to improve the efficiency of production plant by replacing some old machines. The old machines in total were purchased 4 year ago for Tk.630, 000 and being depreciated using straight line method. Two machines will be purchased for tk.1, 500,000 and will be depreciated under MACRS 3 year asset class (33%, 45%, 15%,7%).Tk. 100,000 will be required for installation of the new machines. Tk. 50,000 will be expensed for training up the factory workers so that they can work with the new machine. If the old machines are not replaced those can be sold for tk.45000 at the end of 5 years.
It is assumed that at the end of the project new machines could be sold for nothing. If the new machines come then those will increase the sale per year by tk. 650,000 and decrease operating cost by tk. 200,000 due to increased efficiency. NWC requirement will go up by tk. 80,000.
The WACC is estimated to be 12.5% and tax rate is 40%.
And if the replacement occur then the old machines can be sold now for tk. 450,000.
(a) Calculate tax saving from incremental depreciation resulting from replacement.
(b) Find Operating Cash flow.
