Hello everyone! I've provided the question as well as my answer, want to ensure that i've answered this correctly :) thank you.
ps. the cut off first line just says that the company is looking to replace the old machine
technologically obsolete machinery with the purchase of a new machine for $72,000. Although the older machine has no market value, it could be expected to perform the required operation for another 10 years. The older machine has an unamortized capital cost of $27,000. udgeting Process www.tex-cetera.com The new machine with the latest in technological advances will perform essentially the same operations as the older machine but will effect cost savings of $17,500 per year in labour and materials. The new machine is also estimated to last 10 years, at which time it could be salvaged for $11,500. To install the new machine will cost $7,000. Signs For Fields has a tax rate of 30 percent, and its cost of capital is 15 percent. For accounting purposes, it uses straight-line amortization, and for tax purposes its CCA is 20 percent. a. Should Signs For Fields Machinery purchase the new machine? b. If the old machine has a current salvage value of $9,000, should Signs For Fields purchase the new machine? c. Calculate the IRR and PI for part a. Cashflows Amount 1 - tax rate Aftertax cashflow Present value @ 15% Cost of investment (72,000) (72,000) - (7000) - Installation (7000) 61,479.92 Present value of cost savings 17,500 0.7 12,250 Salvage 11,500 - 2,842.62 Present value of CCA tax shield benefits 11,082.4 NPV (3,595.06) No, they should not purchase the machine, as they will realize a net loss on the investment. B. If the old machine had a current salvage value of 9,000, then: Net cost of new machine: = 72,000 - 9,000 salvage for old = 63,000 Tax implication on loss of the 9,000 tax shield is 9000 (.2 x.37.15+.2)=1542.86 Cashflows Amount 1 - tax rate Aftertax cashflow Present value @ 15% Cost of investment Installation (63,000) (7000) - 17,500 (63,000) (7000) 61,479.92 2,842.62 Present value of cost savings 0.7 12,250 11,500 Salvage Present value of CCA tax shield benefits 11,082.4 1542.86 Present value of tax implication of loss of 9k tax shield Cashflows Amount 1- tax rate Aftertax cashflow Present value @ 15% NPV 6,947.98 In this case, they should purchase the new machine, as they will realize net positive cashflow
