Chris Technologies considering replacing one of its printed circuit board machines with one that is newer and more efficient. The firm purchased the machine 10 years ago at a cost of $150,000. The machine had an expected economic life of 12 years at the time of purchase and an expected salvage value of $12,000 at the end of the 12 years. The original salvage estimate is still good and the machine has a remaining useful life of 2 years. The firm can sell this old machine now to another firm for $35,000. A new machine can be purchased for $175,000 including installation costs. It has an estimated useful (economics) life of 8 years. The new machine is expected to reduce cash operating expenses by $30,000 per year over its 8 years life, at the end of which the machine is estimated to be worth only $5000. The asset is classified as a class 43 property with a CCA of 30%. The firm’s marginal tax rate is 40% and MARR of 12%. Determine
• The opportunity (investment) cost of retaining the old asset?
• The cash flows associated with retaining the old machine in years 1 to 2.
• The cash flows associated with purchasing the new machine in years 1 to 8. (use the opportunity cost concept.)
• If the firm needs the service of these machines for an indefinite period and no technology improvement is expected in future machines, what will be your decision?