Question:

Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,300,000 one year ago; the new one will cost $1,560,000. The new machine will be in CCA Class 10 (30%). It will probably be worth about $300,000 after five years.

The old computer belongs to CCA Class 10 (30%). If we don't replace it now, we will have to replace it in two years. We can sell it now for $420,000; in two years, it will probably be worth $120,000. The new machine will save us $290,000 per year in maintenance costs. The tax rate is 38% and the discount rate is 12%.

a-1. Calculate the EAC for old and new computer. (Negative answers should be indicated by a minus sign. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

EACNew computer$ Old computer$

a-2. What is the NPV of the decision to replace the computer now? (Negative answers should be indicated by a minus sign. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

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