A firm currently operates a machine that was purchased at a cost of $200,000 two years...

 

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A firm currently operates a machine that was purchased at a cost of $200,000 two years ago. It has a current market value of $135,000. A new improved version of the equipment is now on the market at a cost of $175,000. The machines are part of an asset class with capital cost allowances taken at a rate of 30 percent. Special foundations for the new machine would need to be laid requiring 20 hours of labour. The work can be done by the firm's own employees with $20 per hour generally being charged. As there is currently some slack and excess capacity owing to a sales slump, the 200 hours could be provided without disrupting other operations in any way. The firm does not contemplate laying off employees at this time as the current sales slump is expected to be short-lived. The costs for laying the foundations would be expensed in the current accounting period. The firm's tax rate is 40 percent and its cost of capital is 12 percent. Including the present value of tax shields from capital cost allowances in your calculations, what is the total net investment if the firm disposes of the old machine and buys the new one? A firm currently operates a machine that was purchased at a cost of $200,000 two years ago. It has a current market value of $135,000. A new improved version of the equipment is now on the market at a cost of $175,000. The machines are part of an asset class with capital cost allowances taken at a rate of 30 percent. Special foundations for the new machine would need to be laid requiring 20 hours of labour. The work can be done by the firm's own employees with $20 per hour generally being charged. As there is currently some slack and excess capacity owing to a sales slump, the 200 hours could be provided without disrupting other operations in any way. The firm does not contemplate laying off employees at this time as the current sales slump is expected to be short-lived. The costs for laying the foundations would be expensed in the current accounting period. The firm's tax rate is 40 percent and its cost of capital is 12 percent. Including the present value of tax shields from capital cost allowances in your calculations, what is the total net investment if the firm disposes of the old machine and buys the new one?

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