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P13-36B Biotec Inc. wants to replace its R&D equipment with new high-tech equipment. The existing equipment was purchased five years ago at a cost of
P13-36B Biotec Inc. wants to replace its R&D equipment with new high-tech equipment. The existing equipment was purchased five years ago at a cost of $150,000. pected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the old equipment's market value is $75,000 (SO 1, 2) Calculate the initial investment, cash payback, and net At that time, the equipment had an expected life of 10 years, with no ex- The new equipment can be bought for $200,000, including installation. Over its 10-year life, it will reduce raw mate- present value. rial usage and overhead, and as a result R&D costs will decrease from $179,000 to $158,000 for the first six years and from $144,000 to $105,200 for the last four years. Net working capital requirements will also increase by $25,000 at the time of replacement. It is estimated that the new equipment can be sold for $50,000 at the end of its life. Since the new equipments cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is five years Instructions (a) Calculate the initial investment amount. (b) Calculate the project's cash payback period. (c) Calculate the projecs net present value. (d) State whether or not the company should replace the old R&D equipment with the new high-tech equipment. Justify (a) $150,000 your answer (adapted from CGA-Canada, now CPA Canada)
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