B-5 (10 Marks)

Greenwood Ready Mix is considering the replacement of nine of its cement mixers. The existing cement mixers were bought 6 years ago for $125,000 each and have a remaining useful life of 3 years. The firm does not expect to realize any return from scrapping the old cement mixers in 3 years, but if they were sold now, the firm would receive $40,000 per cement mixer.

Five new cement mixers are expected to do the work of the nine old ones. The new cement mixers have a purchase price of $250,000 each, and an estimated useful life of three years and zero estimated salvage value. The new cement mixers are expected to economize on repair costs, routine maintenance, fuel and oils. For each of the old cement mixers these costs are estimated to be $55,000 per year for the next three years; if the new cement mixers are purchased, this figure will be $40,000 per cement mixer.

Each cement mixer requires one driver at a cost of $65,000 per year. The firm used an 12% after-tax cost of capital. The relevant capital cost allowance rate is 30% and the firm's tax rate is 40% .

REQUIRED:

Using an INCREMENTAL Net Present Value approach, evaluate the desirability of replacing the old cement mixers. (Do NOT present one solution for the old cement mixers and one solution for the new cement mixers)