Question
Schneider Industries Ltd. is considering the replacement of existing machinery with some new, more efficient equipment. The suppliers price on the new equipment has been
Schneider Industries Ltd. is considering the replacement of existing machinery with some new, more efficient equipment. The suppliers price on the new equipment has been quoted at $80,000 The existing machinery could be sold at auction for an estimated value of $10,000. Shipping costs to transport it to the auction site are expected to amount to $3,000. However, if not sold, it could be expected to continue operating for another 12 years with an immediate capital upgrade of $22,000 The unamortized cost of the existing machine now is $24,000. The new equipment with the latest in technological advances will perform essentially the same operations as the older machine but will affect cost savings of $14,500 per year in labor and materials. The new equipment is also estimated to last 12 years, at which time it could be salvaged for $15,000 The installation and testing costs for the new equipment are expected to be $3,000. Due to the unique nature of the new equipment, an inventory of spare parts must always be maintained for immediate potential use, over its life. The cost of this is estimated at $3,700. Schneider has a tax rate of 40 percent, and its cost of capital is 18 percent. For accounting purposes. it uses straight line amortization, and the required CCA rate is 20 percent. Should Schneider Industries keep the existing machinery, or replace it with the new equipment? Show full details for all steps to support your conclusions.
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