Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000. These computers could be sold today for $300,000. If these computers are sold in five years, they will be worth $50,000. The CCA rate for these computers is 30%.

The company is now considering whether it should replace these computers with newer and more powerful ones. The estimated total purchase cost of the new computers is $1.5 million. These computers can be sold for $300,000 in five years, and their CCA rate remains at 30%. The company expects to obtain before-tax cost savings of $300,000 per year from these new computers.

The company’s marginal tax rate is 35%, and its required rate of return on new equipment is 15%. Should the company replace the computer equipment?

Answer rating: 100% (QA)

BEFORE MAKING DECISION WHETHER TO REPLACE THE COMPUTERS OR NOT LETS HAVE A LOOK AT THE CAPITAL COST ... View the full answer