Signs for Fields Machinery Ltd$.$ is considering the replacement of some technologically obsolete machinery with the

purchase of a new machine for $$72,000.$ Although the older machine has no market value, it could be expected to perform

the required operation for another $10$ years. The older machine has anamortized capital cost of $$27,000.$

The new machine with the latest in technological advances will perform essentially the same operations as the older

machine but will effect cost savings of $$17,500$ per year in labour and materials. The new machine is also estimated to last

$10$ years, at which time it could be salvaged for $$11,500.$ To install the new machine will cost $$7,000.$

Signs for Fields has a tax rate of $30$ percent, and its cost of capital is $15$ percent. For accounting purposes, it uses straight$-$

line amortization, and for tax purposes its CCA is $20$ percent.

a$.$ Should Signs for Fields Machinery purchase the new machine?

b$.$ If the old machine has a current salvage value of $$9,000,$ should Signs for Fields purchase the new machine?

c$.$ Calculate the IRR and PI for part $a.$

Please help me to explain question b and c in the answer sheet n $=10$ T $=30\%$ r $=$I$/$Y$=15\%$ d $=20\%$

a$.$ Expected Aftertax Present Value

Year Event Cash Flow Cash Flow @ $15\%$

$0$ Purchase machine $$(72,000)$ $$(72,000)$

$0$ Installation $(7,000)(7,000)$

$1-10$ Cost savings $17,50012,25061,480$

$=$PV$(15\%,10,12250,0)($PMT $=12250)$

$10$ Salvage $11,5002,843$

$=$PV$(15\%,10,0,11500)($FV$=11500)$

$1$ CCA pool

NPV $=$ $$(2,473)$

$=-72000-7000+61480+2843+12204$

Signs For Fields Machinery should not purchase the new machine.

b$.$ Sell old machine $ $9,000$

Remove from CCA pool: $9,000(\mathrm{.}16024845)(1,442)$

Net increase in NPV $7,558$

Overall the new NPV $=$ $ $5,085$

Signs For Fields Machinery should now purchase the new machine.

$$

c$.$ Expected Aftertax Present Value

Year Event Cash Flow Cash Flow @ $14\%$

$0$ Purchase machine $$(72,000)$ $$(72,000)$

$0$ Installation $(7,000)(7,000)$

$1-10$ Cost savings $17,50012,25063,897$

$10$ Salvage $11,5003,102$

$0$ CCA pool

NPV $=$ $ $570$

$$570$ PV @ $14\%$ $ $570$ PV @ $14\%$

$(2,473)$ PV @ $15\%0,000($Cost$)$

$$3,043$ $ $570$