Metro Bottling Company is contemplating replacing one of its bottling machines with a newer and more efficient one. A just completed consultant's report, which cost Metro $12,000, provided the following rationale for the purchase.
The old machine has a current value of $265,000 and a remaining useful life of 6 years. If Metro keeps the machine for another 6 years, it should be able to sell it at that time for $20,000. The new machine has a purchase price of $1,175,000, an estimated useful life of 6 years, and estimated salvage value of $145,000. Installation and training will cost $15,000. The new machine will economize on electric power usage and labour and repair costs, as well as reduce the number of defective bottles. A total annual savings of $264,000 will be realized if the new machine is installed. The new machine will initially free up $7,000 in working capital. Both machines fall into CCA asset class 43, which has a 30% CCA rate. The company's tax rate is 25%, and it has a WACC of 12%. Should the company purchase the new bottling machine?