A Large Printing Company Is Considering Purchasing a New Printing

question 38

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 percent and the asset class will remain open.The company projects that operating profit will increase by $400,000 per year.The company's tax rate is 40 percent and the cost of capital is 12 percent.What is the NPV of the replacement decision?

• A) $220,903.91
• B) $224,123.64
• C) $274,065.62
• D) $277,285.35

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Definitions:

Negotiated Price Approach

A pricing strategy where the final sale price of a product or service is determined through bargaining between the buyer and the seller.

Market Price Approach

An approach to transfer pricing that uses the price at which the product or service transferred could be sold to outside buyers as the transfer price.

Transfer Prices

Prices set for the sale of goods and services between controlled or related legal entities within an enterprise.

Market Price Approach

The market price approach is a method used to value assets based on the current market price of similar or identical assets.