Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm currently operates a machine that was purchased at a cost of $250,000 two years ago. It has a current market value of $135,000.

A firm currently operates a machine that was purchased at a cost of $250,000 two years ago. It has a current market value of $135,000. A new improved version of the equipment is now on the market at a cost of $175,000. The machines are part of an asset class with capital cost allowances taken at a rate of 30 percent. Special foundations for the new machine would need to be laid requiring 20 hours of labour. The work can be done by the firms own employees with $40 per generally being charged. As there is currently some slack and excess capacity owing to a sales slump, the 200 hours could be provided without disrupting other operations in any way. The firm does not contemplate laying off employees at this time as the current sales slump is expected to be short-lived. The costs for laying the foundations would be expensed in the current accounting period. The firms tax rate is 40 percent, and its cost of capital is 12 percent. Including the present value of tax shields from capital cost allowances in your calculations, what is the total net investment if the firm disposes of the old machine and buys the new one?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance Terms Financial Education Is Your Best Investment

Authors: Thomas Herold

1st Edition

1090822871, 978-1090822871

More Books

Students also viewed these Finance questions