A large printing company is considering purchasing a new printing press to replace the existing one that cost the company $1 million five years ago.The new machine will cost the company $1.8 million,has an economic life of ten years,and an expected salvage value of $150,000.The old machine can be sold for $200,000 today or could be sold for $10,000 in ten years.Both machines have a CCA rate of 30 percent and the asset class will remain open.The company projects that operating profit will increase by $400,000 per year.The company's tax rate is 40 percent and the cost of capital is 12 percent.What is the NPV of the replacement decision?

Question

Quizplus · Accepted Answer

CF₀ = C₀ = $1,800,000 - $200,000 = $1,600,000,SV = $150,000 - $10,000 = $140,000 11ea8229_3476_9cd2_bbd8_a5dca0afa4ec_TB1726_00 PV(CFAT)= $400,000*(1 - 40%)*PVAF(12%,10)= $1,356,053.53 11ea8229_3476_9cd3_bbd8_c1ad5d4673c9_TB1726_00 NPV = -$1,600,000 + $419,774.13 + $1,356,053.53 + $45,076.25 = $220,903.91

A Large Printing Company Is Considering Purchasing a New Printing