A firm is considering the purchase of a new computer system at $180,000 to replace the existing system.The existing system has a 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 percent,and the asset class will remain open.The firm's marginal tax rate is 40 percent and its cost of capital is 10 percent.What is the NPV of the replacement decision?

Question

Quizplus · Accepted Answer

CF₀ = C₀ = $180,000 - $50,000 = $130,000,SV = $50,000 - $10,000 = $40,000 11ea8229_3476_75c0_bbd8_4d4e0a37351c_TB1726_00 PV(CFAT)= $60,000*(1 - 40%)*PVAF(10%,5)= $136,468.32 11ea8229_3476_75c1_bbd8_0d9cd3b40cec_TB1726_00 NPV = -$130,000 + $32,483.15 + $136,468.32 + $24,836.85 = $63,788.32

A Firm Is Considering the Purchase of a New Computer