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What should the manager decide

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Question - A financial manager is evaluating a replacement project: purchase a new excavator to replace the existing on that has become obsolete quickly by the advance of technology.

The company bought the existing excavator one year ago at a price of 400,000$ and today can only sell for 35,000. In 10 years, it would only be worth 5000. The new excavator will cost 775,000 today and would increase revenue by 65,000 annually. The new machinery has a 10-yearr life with a salvage value of 100,000.

What should the manager decide? To buy or not to buy the new excavator? Based on NPS analysis of incremental cash flows?

Tax rate is 40%, CCA is 25% for both excavators, and required rate of return for the company is 14%.

Reference no: EM132886794

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