Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

XYZ Manufacturing would like to purchase a machine for its current operations. XYZ would like to know the maximum price it should pay for that

XYZ Manufacturing would like to purchase a machine for its current operations. XYZ would like to know the maximum price it should pay for that machine. That is, how high must the price be for the machine to have an NPV of zero?

You are given the following facts:

1. The new machine will replace the existing machine that has a current market value of $30,000.

2. New machine would reduce before tax operating cost by $15,000 per year for 10 years. These savings in cost would occur at year-end.

3. The old machine is now 5 year old. It is expected to last for another 10 years, and will have no resale value at the end of those 10 years. It was purchased for $60,000 and is being depreciated at a CCA rate of 20%

4. The new machine will also be depreciated at a CCA rate of 20%. XYZ expects to be able to sell the machine for $10,000 at the end of 10 years. At that time XYZ plans to reinvest in a new machine in the same CCA pool

5. The appropriate discount rate is 12%, and the tax rate is 40%.

6. Assume asset pool remains open.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Modern Auditing

Authors: Graham Cosserat

2nd Edition

0470863226, 978-0470863220

More Books

Students also viewed these Accounting questions