Hilton Bay Corporation is planning to buy new equipment to replace the existing one which is already old with reduced output capacity.
The equipment currently in used has zero book value and zero market value. Even the absence of market value, the equipment is still
capable of making production output for the next ten years. But, if the equipment will be replaced with the new one, the company’s technical
experts had estimated that it could bring in cash flows of USD8,000 annually. The new equipment will require cash outlay of USD45,000
including installation cost. Its estimated useful life is ten years. The new equipment is considered to have no salvage value. Hilton’s WACC
is ten percent and with tax rate of 35percent. What would you recommend to Hilton Bay, buy the new equipment or continue using the
existing equipment? Discuss and show all computations.
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