GG Inc. is now considering replacing some old equipment. The market price of the old equipment is $50,000 and the salvage value at the end of five years is $15,000. The new equipment will cost $100,000 and could be sold at the end of five years for $35,000. An additional $4,000 in working capital is required and will be released at the end of five years. The new equipment is estimated to generate $10,000 in before-tax operating income, compared with $6,000 for the old one. Assume that T = 40% and k = 15%. Both the new and old equipment belong to class 10, which has a CCA rate of 30 percent, and the asset class will remain open at the end of five years. Calculate PV of CCA tax shield by formula. Estimate the NPV of the replacement decision and decide whether or not replacement should occur.
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