Jimmy Wong of Wong & Tran Construction Limited 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 of the company’s excavator has dropped significantly, from $250,000 a year ago to $100,000 now. In 10 years, it would be worth only $20,000. The new excavator costs only $200,000 and would increase operating revenues by $20,000 annually. The new excavator has a 10 year life and expected salvage value of $40,000. What should the company do? The tax rate is 42%, the CCA is rate is 30% for both excavators and the required rate of return to the company is 12%. Assume the asset class remains open.

Answer rating: 100% (QA)

The company should purchase ... View the full answer