Reference no: EM132507269

QUESTION 1. Saint John River Shipyards is considering replacing an old riveting machine with a new one that will increase earnings before depreciation from $34,500 to $54,000 per year. The new machine will cost $92,500, and it will have an estimated life of 8 years with an estimated salvage value of $6,500. The new machine falls into Class 43, which has a 30% CCA rate. The company is taxed at 30% and its WACC is 12%. If replaced today, the old machine could be sold for $4,000. If the old machine is kept, it will have no salvage value in 8 years. Should they replace the old riveting machine?

QUESTION 2. Taylor Corporation currently uses an injection-molding machine that was purchased 2 years ago. The CCA rate on the machine is 30%. Currently, it can be sold for $ 2,500 If the old machine is not replaced, it is not expected to have any value at the end of its useful life, estimated to be 6 years from now.

Taylor is offered a replacement machine that has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The CCA rate on the machine is also 30%. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Taylor's tax rate is 30%, and its WACC is 15%. Should the company replace the old machine?