A specialized automobile parts manufacturer is considering the acquisition of a new machine. The new machine is far more efficient than the present machine. It would cost $87,600, would cut annual cash operating costs from
$72,000 to $48,000, and would have zero terminal disposal price at the end of its useful life of three years. The applicable income tax rate is 30%. The after-tax required rate of return is 14%.
The current machine has been used for one year. It will have no useful economic life after three more years. It cost $105,600 when acquired, has a current disposal price of
$39,200, and has a residual disposal price of $7,200.
These machines qualify for a capital cost allowance rate of 20%, declining balance.
Using the net present value method, show whether the new machine should be purchased
(a) Under a total-project approach and
(b) Under a differential approach.

  • CreatedJuly 31, 2015
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