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Question - Angelo is considering the purchase of a new equipment to replace an old one. Both items have a 25% CCA rate. The new equipment costs $13,300 and have a useful life of four years, at which time it will have a salvage of zero. The old equipment can be sold now for $630 and could be scrapped for $380 in four years. The operating revenues will increase annually by $9,300 with the new equipment. The tax rate is 22% and the required rate of return is 15%.
1. What is the present value of CCA tax shield for the new equipment?
2. What is the present value of incremental operating cashflow for the new equipment?
3. What is the NPV of the replacement decision? Should Angelo replace the old equipment with the new one?
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