3. WA Crushing Ltd is considering the purchase of a new grading machine to replace...
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3. WA Crushing Ltd is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased three years ago at an installed cost of $20,000. It was being depreciated using the prime cost method with an effective life of five years (i.e. the depreciation tax savings can only be used for five years). The existing machine is expected to have a usable life of at least five more years. The new machine costs $35,000 and requires $5,000 in installation costs; it will be depreciated using the prime cost method over five years and has a salvage value of $6,000 at the end of its life. The existing machine can currently be sold for $25,000 without incurring any removal or clean up costs. The firm pays 30% taxes on both ordinary income and capital gains.
If the purchase of the new machine results in a cost savings of $5,000 per year and the annual operating cash inflows are the same for both machines, should WA Crushing Ltd replace the machine now and later? State any assumption that may be necessary.
[ 17 marks]
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