XYZ Manufacturing would like to purchase a machine for its current operations. XYZ would like to know

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Question:

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.