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 an undepreciated 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 capital cost allowance is $20$ percent.

Required:

Should Signs for Fields Machinery purchase the new machine?

Answer should be $-$

Tax rate $30\%$

CCA rate $20\%$

Cost of capital $15\%$

Length of project $10$

Initial cost $$72,000$

Installation costs $$7,000$

Salvage value $$11,500$

Cost savings $$17,500$

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

Step $1$:

Use the present value of CCA tax savings formula in the template below:

The tax savings from CCA can be recreated as an equation within Excel as illustrated below:

$=($Initial cost $-$ PV of salvage$)*(($CCA rate$*$ Tax rate$)/($Cost of capital $+$ CCA rate$)*(1+(\mathrm{.}5*$ Cost of capital$))/(1+$ cost of capital$))$

The key to the creation of this equation is the number and placement of the parentheses

Use Cell References for all terms within the equation.

Step $2$:

Determine the present value of cash flow sources.

Expected Aftertax Present

Event Year$($s$)$ Cash Flow Cash Flow Value @$15\%$

Investment $0-$$$72,000-$$$72,000$

Salvage $($sale$)1011,5002,843$

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

Cost savings $1-1017,50012,25061,480$

Tax shield $($CCA$)012,204$

Step $3$:

Determine the net present value of the project by summing the last column.

NPV $-$$$2,473$

$[]-$:

$$

$$

$$

$$

$$

$+$

$+$

$-$:

$$

$$

$$

$$

$$

$+$

$-$

$1$ r

$1\mathrm{.}5$r

r d

dT

C S

C

pv

Calculation of Tax Shield

$=(79,0002,843)*((\mathrm{.}2*\mathrm{.}3)/(\mathrm{.}15+\mathrm{.}2))*((1+(\mathrm{.}5*\mathrm{.}15)/(1+\mathrm{.}15))$

$=76157*\mathrm{.}1714*\mathrm{.}9348$

Tax Shield $=12,204$

Kindly explain all the steps using financial calculator