Evaluate net present value of machine, Financial Management

Kenneth Su Gold Corp (KSGC) is considering the purchase of a new piece of machinery. The new machinery would cost $80,000. You are given the following facts:

  • The new machine will replace an existing machine that has a current market value of $30,000.
  • The new machine would reduce before tax operating costs by $15,000 per year for 10 years. These cost savings would occur at year-end.
  • The old machine is now 5 years old. It is expected to last for another 10 years, and will have no resale value at the end of those 10 years. It was purchased for $60,000 and is being depreciated at a CCA rate of 20%.
  • The new machine will also be depreciated at a CCA rate of 20%. KSGC expects to be able to sell the machine for $10,000 at the end of 10 years. At that time KSGC plans to reinvest in a new machine in the same CCA pool.
  • The new machine requires a one-time increase in net working capital of $5,000. This amount is required at  the beginning of the project and is fully recovered at the project's end.  
  • The appropriate discount rate is 12% and the tax rate is 40%. What is the NPV associated with replacing the machine?
Posted Date: 2/15/2013 7:35:04 AM | Location : United States

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