A manufacturing company is considering purchasing a new machine to replace the existing one to improve production efficiency.The new machine will cost the company $200,000 and is expected to sell for $15,000 in ten years.The old machine has a market value of $50,000 today and could be sold for $5,000 in ten years.Both machines have a CCA rate of 30% and the asset class will remain open, and the half-year rule applies in the first year.With the new machine, the company expects $50,000 savings in operating expenses per year.The company's tax rate is 40% and the cost of capital is 15%.What is the present value of the incremental CCA tax savings generated by the replacement decision? Include the half-year rule.

Question

Quizplus · Accepted Answer

The present value of the incremental CCA tax savings generated by the replacement decision is $36,403. This is calculated as follows:Incremental CCA tax savings = (New machine CCA - Old machine CCA) x Tax rate= [(200,000 x 30%) - (50,000 x 30%)] x 40%= $12,000 x 40%= $4,800Present value of incremental CCA tax savings = $4,800 / (1 + 15%)^1= $4,800 / 1.15= $36,403

A Manufacturing Company Is Considering Purchasing a New Machine to Replace