A Firm Is Considering the Purchase of a New Computer

question 78

Multiple Choice

A firm is considering the purchase of a new computer system at a cost of $180,000 to replace their existing system.The existing system has a current market value of $50,000 today and an expected salvage value of $10,000 at the end of five years.The new system will have a life of five years and is expected to sell for $50,000 at the end of five years.The new system will save the firm $60,000 per year in operating expenses over the life of the system.Both computer systems belong to asset class 45, which has a CCA rate of 45%, and the asset class will remain open and the half-year rule will apply in the first year.The firm's marginal tax rate is 40% and its cost of capital is 10%.What is the NPV of the replacement decision?

• A)$67,965
• B)$69,998
• C)$77,376
• D)$83,585

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Definitions:

Inferred Trust

A trust implied by law to work out justice between the parties, based on certain circumstances or conduct, as opposed to being established by explicit words.

Vicarious Performance

Performance by another designated person of the obligations under a contract rather than the actual contracting party.

Qualified Person

An individual who possesses the necessary education, experience, and credentials to perform a specific job or task.

Privity of Contract

A legal concept stating that only the parties to a contract have the right to sue each other to enforce the terms of that contract.