QUESTION 4 Mahkota Engineering Sdn. Bhd., in the 20% income tax bracket, is cons
ID: 1131090 • Letter: Q
Question
QUESTION 4 Mahkota Engineering Sdn. Bhd., in the 20% income tax bracket, is considering the purchase of a new piece of Machinery that will yield benefits of RM200,000 for year 1, RM300,000 for year 2, RM400,000 for year 3, RM400,000 for year 4, and RM400,000 for year 5. The Machinery is to be depreciated using the Modified Accelerated Cost Recovery System (MACRS) with three year recovery period (3-year property for Personal Property: Half Year Convention). The company believes the machinery can be sold at the end of five (5) years of use for 20% of the original purchase price, x. What is the maximum purchase cost, X the company can pay if it requires a 20% after tax rate of return? (23 Marks) END OF QUESTION PAPERExplanation / Answer
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The above calculation involves the calculation of total income machine will generate in the 5 years of use substracting the tax to be paid on that income.
Post that we will add the 20% sale value after the 5th year of the use.
Hence the maximum price that the company will pay = RM1632000. Anything below this will be profit for the compaany and anything above it would be a loss.
There is no point considering the depriciation as it will not impact the purchase price of the machine.
Year 1 Year 2 Year 3 Year 4 Year 5 Machine yield 200000 300000 400000 400000 400000 Tax 40000 60000 80000 80000 80000 Net income 160000 240000 320000 320000 320000 Sum of total net income 1360000 20% of total net income 272000 Total yield from the machine 1632000 Maximum purchase price 1632000