H. Improvements Ltd. is evaluating the replacement of an older machine. There are two possible replacements under consideration-the OuOu and the Major OuOu. The existing machine was purchased a few years ago for $32,000 and currently has a book value of $8,500. If sold today, it would probably be worth $4,500.
The OuOu machine has a price tag of $50,000 and expected annual operating costs of $19,500. It could do the required job for seven years, at which time it could be sold for a projected $6,000.
The Major OuOu machine is a little pricier at $69,000, but its expected annual operating costs are only $13,000. After seven years it could be sold for approximately $8,000.
The existing machine is presently a Class 10 asset for CCA purposes, with a 30 percent rate. Either of the new machines would join the same asset pool. H. Improvements Ltd. has a tax rate of 25 percent and its cost of capital is 14 percent.
Which new machine would you recommend H. Improvements Ltd. purchase?