Marvellous Mining Company (MMC) is negotiating for the purchase of a new piece of equipment for its current operations. MMC wants to know the maximum price that it should be willing to pay for the equipment. That is, how high must the price be for the equipment to have an NPV of zero? You are given the following facts:
1. The new equipment would replace existing equipment that has a current market value of $35,000.
2. The new equipment would not affect revenues, but before-tax operating costs would be reduced by $12,500 per year for eight years. These savings in cost would occur at year-end.
3. The old equipment is now five years old. It is expected to last for another five years and to have no resale value at the end of those five years. It was purchased for $40,000 and is being depreciated at a CCA rate of 30 percent.
4. The new equipment will also be depreciated at a CCA rate of 30 percent. MMC expects to be able to sell the equipment for $6,000 at the end of five years. At that time, the firm plans to reinvest in new equipment in the same CCA pool.
5. MMC has profitable ongoing operations.
6. The appropriate discount rate is 14 percent.
7. The tax rate is 40 percent.