(10 marks) Willie's Widgets currently operates a machine that was purchased at a cost of $270,000 three years ago. Its current market value is $180,000. An improved version of the equipment is now available for $300,000. Both machines belong to CCA class 10 (CCA rate = 30%) and have an expected remaining useful life of three years. In three years the older machine will be worth $25,000 while the new machine will be worth $190,000. The company currently has many class 10 assets and management believes that there will be many class 10 assets in three years.

The new machine will increase annual sales by $100,000 but annual costs will increase by $50,000. The following Table shows the typical net working capital requirements for Willie's Widgets as a percentage of the sales revenue for that year (the same percentages would apply to the additional sales generated by the new machine):

Inventory 6%

Accounts Receivable 4%

Accounts Payable 5%

Willie's Widgets has a cost of equity of 12% and a weighted average cost of capital (WACC) of 10%. The effective marginal corporate tax rate is 40%.

Calculate the NPV for this replacement decision. Should Willie's Widgets implement this project?