An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company's excavator has dropped significantly, from $400,000 a year ago to $40,000 now. In 10 years, it would be worth only $5,000. The new excavator costs only $650,000 and would increase operating revenues by$70,000 annually. The new equipment has a 10-year life and expected salvage value of $105,000. What should the officer do? The tax rate is 35%, the CCA rate, 25% for both excavators and the required rate of return for the company is 13%.
Initial cost of new machine, Salvage value of old machine, PV of cost savings, PV of salvage value of old machine, CCA tax shield of original machine, CCA tax shield of new machine, NPV, and a recommendation