Question

An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now. In ten years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a ten-year life and expected salvage value of $175,000. The tax rate is 35%, the CCA rate, 25% for both excavators, and the required rate of return for the company is 14%. What is the NPV of the new excavator? (Negative answer should be indicated by a minus sign. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

NPV           $ ?

What should the officer do?

A. Replace the existing excavator.

B. Do not replace the existing excavator.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

05:39 C w ENG 99+ 31-07-2020 29 Х K1522 . KH KI KJ KK KL KM KN KO KP KQ KR KS 507 STEP 1 COST OF EQUIPMENT -900000 STEP 2 PRESENT VALUE OF OPERATING CASH FLOWS [SEE NOTE 1] 305142.77 STEP 3 PVCCATS ( SEE NOTE 2] 179114.95 STEP 4 46395.94 PV OF SALVAGE VALUE 172000 X PVIF @14%, 10 YEARS = 172000 X 0.2697438 NPV = STEP 1 + STEP 2 + STEP 3 + STEP 4 NOTE PVIF @14%, 10 YEARS 1/(1+r)^n 0.2697438 ANS 1 -369346.35 508 509 510 511 512 513 514 515 516 517 518 519 520 521 522 523 524 525 ANS 2:B DO NOT REPLACE AS NPV IS NEGATIVE 526 527 528 529 530 HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT +

C w ENG 05:40 31-07-2020 99+ 29 x KS486 . KH KI КJ KK KL KM KN KO KP KQ KR KS 483 CALCULATION OF OPERATING CASH FLOW (OCF] 484 NOTE 1 485 486 487 488 EBIT 90000 TAX 31500 OCF 58500 489 NOTE 490 491 492 PV OF ALL OPERATING CASH FLOW= 58500 X PVIFA @ 14%, 10 YEARS 58500 X 5.2161156 305142.77 493 PV OF ALL OPERATING CASH FLOW= PVIFA @14%, 10 YEARS (1/r)*(1-(1-(1/(1+r)^n)) 5.2161156 CALCULATION OF PRESENT VALUE OF TAX SHIELD 494 495 496 NOTE 2 497 498 499 500 501 502 503 504 505 506 с C= COST OF EQUIPMENT 900000 [NET COST = 950000-50000] CdT 1+0.5r Sdt d = DEPRECIATION RATE 25% 1 I -]-[ PVCCATS = Tc = TAX RATE 35% rtd 1+r d+r(1+r) S-NET SALVAGE VALUE = 175000 - 3000 = 172000 r=DISCOUNT RATE 14% LIFE = n 10 PVCCATS= ((900000*0.25*0.35)/(0.14 +0.25))*((1+0.5*0.14)/(1+0.14)) - ((172000*0.25*0.35)/(0.25 +0.14)*(1/((1+0.14)^10))) PVCCATS= 179114.95 HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT