Signs For Fields Machinery Ltd. is considering the replacement of some technologically obsolete machinery with the purchase
Question:
Signs For Fields Machinery Ltd. is considering the replacement of some technologically obsolete machinery with the purchase of a new machine for $72,000. Although the older machine has no market value, it could be expected to perform the required operation for another 10 years. The older machine has an unamortized capital cost of $27,000.
The new machine with the latest in technological advances will perform essentially the same operations as the older machine but will effect cost savings of$17,500 per year in labour and materials. The new machine is also estimated to last 10 years, at which time it could be salvaged for $11,500. To install the new machine will cost $7,000.
Signs For Fields has a tax rate of 30 percent, and its cost of capital is 15 percent. For accounting purposes, it uses straight -line amortization, and for tax purposes its CCA is 20 percent.
a. Should Signs For Fields Machinery purchase the new machine?
b. If the old machine has a current salvage value of $9,000, should Signs For Fields purchase the new machine?
c. Calculate the IRR and PI for part a.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta