An outmoded paper machine was purchased for $300,000 some 12 years ago. Its annual operating costs are $48,000. It is expected to last 8 more years, at which time it will have zero salvage. A newer model of the paper machine will cost $470,000 and iwll have an economic life of 15 years. Following a service period of 8 years, assume that the new machine will have a market value equal to its book value. The new machine is expected to have average operating cots of $30,000 per year. The CCA for these machinese is 25 percent (declining balance). The required rate of return is 10 percent, and the effective tax rate is 40 percent.
a) Assuming that the old machine has a market value equal to its book value, what is its after-tax EAC?
b) What is the after-tax EAC of the challenger?