A Large Printing Company Is Considering Purchasing a New Printing

question 6

Multiple Choice

A large printing company is considering purchasing a new printing press to replace the existing one that cost the company $1 million five years ago.The new machine will cost the company $1.8 million, has an economic life of ten years, and an expected salvage value of $150,000.The old machine can be sold for $200,000 today or could be sold for $10,000 in ten years.Both machines have a CCA rate of 30% and the asset class will remain open and the half-year rule applies in the first year.The company projects that operating profit will increase by $400,000 per year.The company's tax rate is 40% and the cost of capital is 12%.What is the NPV of the replacement decision?

• A)$223,204
• B)$224,124
• C)$274,066
• D)$277,285

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Definitions:

Recorded Mortgage

A mortgage that has been formally documented with a governmental office or registry, thereby providing public notice of the lien on the property.

Financing Commitment

An assurance provided by a lender indicating the terms under which they agree to lend money to a borrower.

First Mortgage

A primary lien on a property that has precedence over all other claims or liens in the event of default or sale.

Mortgage Assignment

The transfer of a mortgage from one party to another, either for the benefit of changing lenders or selling the debt to another entity.