As the capital budgeting director of Union Mills Inc., you areanalyzing the replacement of an automated loom system. The oldsystem was purchased 5 years ago for $200,000; it is in CCA class8; it has 5 years of remaining life; however, due to technologicalchange there is no resale value for the system. The new system hasa price of $300,000, plus $50,000 in installation costs. The newsystem falls into the same CCA class, has a 5-year economic life, a$100,000 after-tax salvage value, and will require a $20,000increase in working capital at the beginning which will berecovered at the end of five years. The new system will decreaseoperating costs by $90,000 per year. The firm has a marginal taxrate of 40%, and the appropriate required rate of return for thisproject is 12%. What is the net present value of replacing theloom? At what level of pre tax operating savings will the projectNPV be zero? The CCA rate applicable is 30% and half year rule isapplicable.
