Question
A business' is considering replacing current equipment with new technology that would be faster and cheaper. New machine cost is $1,490,000, with a useful life
A business' is considering replacing current equipment with new technology that would be faster and cheaper. New machine cost is $1,490,000, with a useful life of 6 years. Current equipment was bought 2 years ago for $1,500,000 and could be rid of now for $650,000. The current equipment will be completely worn out in 6 years' time, with a salvage value of $0. The new machines have an expected salvage value of $400,000 in 6 years' time. New equipment would save the company $450,500 per year, after tax. Installing the new machines would also require a working capital increase of $75,000, which would be fully recovered at time of salvage.
A CCA rate of 20% applies, and the PVCCATS method is appropriate. The company's tax rate and required return are 30% and 13.5%, respectively. Calculate the NPV and the IRR. Show the formulas used.
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