SAB Company The SAB Company is considering the purchase of a new machine at a cost of $ 14,000 to replace an older one whose book value for tax purposes is $ 3,000 and can be sold now for $ 1,500. In four years, the residual value of the old machine should match its book value (its UCC). The CCA rate equals 55%. The new machine will produce labour savings of $ 5,000 before taxes, have a useful life of four years and can be sold for $2,000 by the end of the fourth year. The tax rate is 19%, and the discount rate is 16% for such a project. Question Should we replace the machine, according to the following assumptions? Note: The asset class of the old machine is closed, and the new machine will be in a new asset class at the CCA rate of 60% (the disposal of the new machine at the end of the project will not result in the closure of this class)
SAB Company The SAB Company is considering the purchase of a new machine at a cost of $ 14,000 to replace an older one whose book value for tax purposes is $ 3,000 and can be sold now for $ 1,500. In four years, the residual value of the old machine should match its book value (its UCC). The CCA rate equals 55%. The new machine will produce labour savings of $ 5,000 before taxes, have a useful life of four years and can be sold for $2,000 by the end of the fourth year. The tax rate is 19%, and the discount rate is 16% for such a project. Question Should we replace the machine, according to the following assumptions? Note: The asset class of the old machine is closed, and the new machine will be in a new asset class at the CCA rate of 60% (the disposal of the new machine at the end of the project will not result in the closure of this class)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:SAB Company
The SAB Company is considering the purchase of a new machine at a cost of $ 14,000 to replace an older one
whose book value for tax purposes is $ 3,000 and can be sold now for $ 1,500. In four years, the residual value
of the old machine should match its book value (its UCC). The CCA rate equals 55%.
The new machine will produce labour savings of $ 5,000 before taxes, have a useful life of four years and can be
sold for $2,000 by the end of the fourth year.
The tax rate is 19%, and the discount rate is 16% for such a project.
Question
Should we replace the machine, according to the following assumptions?
Note: The asset class of the old machine is closed, and the new machine will be in a new asset class at the CCA
rate of 60% (the disposal of the new machine at the end of the project will not result in the closure of this
class)
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