A firm is considering the purchase of a new computer system at a cost of $180,000 to replace their existing system.The existing system has a current market value of $50,000 today and an expected salvage value of $10,000 at the end of five years.The new system will have a life of five years and is expected to sell for $50,000 at the end of five years.The new system will save the firm $60,000 per year in operating expenses over the life of the system.Both computer systems belong to asset class 45, which has a CCA rate of 45%, and the asset class will remain open and the half-year rule will apply in the first year.The firm's marginal tax rate is 40% and its cost of capital is 10%.What is the NPV of the replacement decision?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the replacement decision is $67,965. The NPV is calculated as follows:NPV = -Initial investment + Present value of future cash flowsInitial investment = -$180,000Present value of future cash flows = $60,000 * (PVIFA(10%, 5) - PVIF(10%, 5) * (1 - (1 - 0.45)^5) / 0.45) + $50,000 * PVIF(10%, 5)= $60,000 * (3.7908 - 3.7908 * (0.2371) / 0.45) + $50,000 * 0.6209= $60,000 * 3.3622 + $50,000 * 0.6209= $201,732 + $31,045= $232,777NPV = -$180,000 + $232,777= $67,965

A Firm Is Considering the Purchase of a New Computer