Question
As the capital budgeting director of Union Mills Inc., you are analyzing the replacement of an automated loom system. The old system was purchased 5
As the capital budgeting director of Union Mills Inc., you are analyzing the replacement of an automated loom system. The old system was purchased 5 years ago for $200,000; it is in CCA class 8; it has 5 years of remaining life; however, due to technological change there is no resale value for the system. The new system has a price of $300,000, plus $50,000 in installation costs. The new system falls into the same CCA class, has a 5-year economic life, a $100,000 after-tax salvage value, and will require a $20,000 increase in working capital at the beginning which will be recovered at the end of five years. The new system will decrease operating costs by $90,000 per year. The firm has a marginal tax rate of 40%, and the appropriate required rate of return for this project is 12%. What is the net present value of replacing the loom? At what level of pre tax operating savings will the project NPV be zero? The CCA rate applicable is 30% and half year rule is applicable.
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