An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now.

In 10 years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a 10-year life and expected salvage value of $175,000. The tax rate is 35 percent, the CCA rate, 25 percent for both excavators, and the required rate of return for the company is 14 percent.

What is the NPV of the new excavator?

Answer rating: 100% (QA)

Calculation of NPV of new excavator Year 0 1 2 3 4 5 6 7 8 9 10 NPV Cost of new excavator 950000 Aft... View the full answer