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

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Signs For Fields Machinery Ltd. is considering the replacementof some technologically obsolete machinery with the purchase of anew machine for $72,000. Although the older machine has no marketvalue, it could be expected to perform the required operation foranother 10 years. The older machine has an unamortized capital costof $27,000. The new machine with the latest in technologicaladvances will perform essentially the same operations as the oldermachine but will effect cost savings of $17,500 per year in labourand materials. The new machine is also estimated to last 10 years,at which time it could be salvaged for $11,500. To install the newmachine will cost $7,000. Signs For Fields has a tax rate of 30percent, and its cost of capital is 15 percent. For accountingpurposes, it uses straight-line amortization, and for tax purposesits CCA is 20 percent.
a. Should Signs for Fields Machinery purchase the newmachine?
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.

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4.0 Ratings (405 Votes)

a In the given question Net Present Value of the new equipment needs to be calculated which will help to make the final decision Formula to calculate NPV Initial Investment Cash Inflow11R1 Cash Inflow21R2 Cash Inflow31R3 Cash Inflown1Rn Where R is the required rate of return per period n is number of years NPV of the new machinery Initial investment Cost of Machinery Installation Cost 72000 7000 79000 R 15 n 10 Years Net Cost Savings per Year Year Year 1 See Answer

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Signs For Fields Machinery Ltd. is considering the replacementof some technologically obsolete machinery with the purchase of anew machine for $72,000. Although the older machine has no marketvalue, it could be expected to perform the required operation foranother 10 years. The older machine has an unamortized capital costof $27,000. The new machine with the latest in technologicaladvances will perform essentially the same operations as the oldermachine but will effect cost savings of $17,500 per year in labourand materials. The new machine is also estimated to last 10 years,at which time it could be salvaged for $11,500. To install the newmachine will cost $7,000. Signs For Fields has a tax rate of 30percent, and its cost of capital is 15 percent. For accountingpurposes, it uses straight-line amortization, and for tax purposesits CCA is 20 percent.a. Should Signs for Fields Machinery purchase the newmachine?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.