A company is considering buying a new machine for $1,200,000. The new machine will replace the current machine, which can be sold now for $75,000. The company will incur installation costs of $130,000 if it buys the new machine. The company’s tax rate is 35% and its after tax is 12%.
Buying the new machine would generate the following annual savings:
Year 1 ……………………..$130,000
Year 2 ……………………..140,000
Year 3 ……………………..150,000
Year 4 ……………………..175,000
Year 5 ……………………..180,000
Year 6 ……………………..185,000
Year 7 ……………………..195,000
If the company decides to keep the old machine for 7 more years, it will have to spend $45,000 in 3 years from now for a complete refurbishment. On the other hand, if the company decides to buy the new machine, it would have to spend $40,000 for maintenance in year 5. In 7 years, the of the new machine would be $120,000, and the for the old machine would be $30,000. The capital cost allowance for this type of machine is 15%.
REQUIRED
Compute the for the acquisition of the new machine and state whether the company should proceed with the investment or not?
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