Question 1 (10 points) There is information on equipment options. You are required to analyze only one option. But if you wish, you can analyze both options for practice. There are two parts to this question: H. Improvements Ltd. is evaluating the replacement of an older machine. There are two possible replacements under consideration-the Ouou and the Major OuOu. The existing machine was purchased a few years ago for $32,000 and currently has a book value of $8,500. If sold today, it would probably be worth $4,500.5 The OuOu machine has a price tag of $50,000 and expected annual operating costs of $19,500. It could do the required job for seven years, at which time it could be sold for a projected $6,000. SEP The Major OuOu machine is a little pricier at $69,000, but its expected annual operating costs are only $13,000. After seven years it could be sold for approximately $8,000.se H. Improvements Ltd. has a tax rate of 25 percent and its cost of capital is 14 percent.se Required: Use the Tax Shield Approach (not the PV of CCA Tax Shield) to calculate the NPV of the OuOu option. Use the information for H. Improvements Ltd., plus the following additional information, to answer this question. The existing machine is presently a Class 10 asset for CCA purposes, with a 30 percent rate. Calculate the NPV of the OuOu option using the PV of the CCA Tax Shield approach. (Your calculations should show your work for the PV of the CCA Tax Shield.) Hint: In this problem, we are analyzing operating costs, so your answer will be negative. Hint: Costs that would be incurred regardless of the investment decision should be ignored. Question 1 (10 points) There is information on equipment options. You are required to analyze only one option. But if you wish, you can analyze both options for practice. There are two parts to this question: H. Improvements Ltd. is evaluating the replacement of an older machine. There are two possible replacements under consideration-the Ouou and the Major OuOu. The existing machine was purchased a few years ago for $32,000 and currently has a book value of $8,500. If sold today, it would probably be worth $4,500.5 The OuOu machine has a price tag of $50,000 and expected annual operating costs of $19,500. It could do the required job for seven years, at which time it could be sold for a projected $6,000. SEP The Major OuOu machine is a little pricier at $69,000, but its expected annual operating costs are only $13,000. After seven years it could be sold for approximately $8,000.se H. Improvements Ltd. has a tax rate of 25 percent and its cost of capital is 14 percent.se Required: Use the Tax Shield Approach (not the PV of CCA Tax Shield) to calculate the NPV of the OuOu option. Use the information for H. Improvements Ltd., plus the following additional information, to answer this question. The existing machine is presently a Class 10 asset for CCA purposes, with a 30 percent rate. Calculate the NPV of the OuOu option using the PV of the CCA Tax Shield approach. (Your calculations should show your work for the PV of the CCA Tax Shield.) Hint: In this problem, we are analyzing operating costs, so your answer will be negative. Hint: Costs that would be incurred regardless of the investment decision should be ignored
