Capital Budgeting Decision: To Replace the Asset or Not to Replace the Asset that is the Question!

The Taylor Corporation is using a machine that originally cost $66,000. The machine has a book value of $66,000 and a current market value of $40,000. The asset is in the Class 5 CCA pool that allows 35% depreciation per year. It will have no salvage value after 5 years and the company tax rate is 35 percent.

Jacques Detaille, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $70,000. The new machine will cut operating costs by $10,000 each year for the next five years, and will have a salvage value in year five of $5,000.

Taylor Corporation's cost of capital is 8 percent.

Should the firm replace the asset? What is your advice to Jacques? Use NPV methodology to solve this problem. You must show all your work including formulas, values uses, financial calculator function keys and inputs (if using one), and all assumptions as appropriate to answering the question.