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M and C Hammer Machinery Ltd. is considering the replacement of some existing machinery with a new machine costing $54,000. The older machine has no

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M and C Hammer Machinery Ltd. is considering the replacement of some existing machinery with a new machine costing $54,000. The older machine has no market value, but could continue to perform the required operation for another 10 years. The older machine has an unamortized capital cost of $20,000. The new machine will perform essentially the same operations as the older machine but will result in before-tax cost savings of $15,000 per year in labour and materials. The new machine is also expected to last 10 years, at which time it could be salvaged for $8,000. To install the new machine will cost $5,000. M and C Hammer has a tax rate of 30 percent, and it cost of capital is 14 percent. Its capital cost allowance is 20 percent. Three Questions Calculate the net present value using the Tax Shield approach (nearest dollar). What is the profitability index? Calculate the net present value using the PV of the CCA Tax Shield approach (nearest dollar), M and C Hammer Machinery Ltd. is considering the replacement of some existing machinery with a new machine costing $54,000. The older machine has no market value, but could continue to perform the required operation for another 10 years. The older machine has an unamortized capital cost of $20,000. The new machine will perform essentially the same operations as the older machine but will result in before-tax cost savings of $15,000 per year in labour and materials. The new machine is also expected to last 10 years, at which time it could be salvaged for $8,000. To install the new machine will cost $5,000. M and C Hammer has a tax rate of 30 percent, and it cost of capital is 14 percent. Its capital cost allowance is 20 percent. Three Questions Calculate the net present value using the Tax Shield approach (nearest dollar). What is the profitability index? Calculate the net present value using the PV of the CCA Tax Shield approach (nearest dollar)

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