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12-30 a. New machine cost $1.

2 million Installation cost $150000 Old machine Salvage $185000 Reduce OC $350000 per year for 5 years New M. salvage at the end of 5th year $250000 Increase in NWC $25000 Decrease in NWC at the end of 5th year $25000 Cost of capital @ 9% CCA Rate 30%

($1165000)

Incremental cost: 1200000+150000185000=1165000

$1361500

PVIFa: 350000*3.890=1361500

$162500

PVIF: 250000*0.650=162500

($25000) $16250

PV PVIF: 25000*0.65=16250 Tax shield: Tax shield loss:

$343662.7 ($50000)

NPV: $643912.7

Decision: Since NPV>0, Proceed the proposal

b.
Incremental cost Reced operation cost New machine salvage Increses in NWC Decrese in NWC Tax shield Tax shield loss Internal rate of return -1165000 1361500 162500 -25000 16250 343662.7 -50000 35% IRR(I5:I11)

c. Holiday Manufacturing should accept replacement proposal since it will result in an increase in Net Present Value of $643912.7. d. Because the IRR is the discount rate that makes the NPV of a project equal to 0, therefore the highest cost of capital should equal to the IRR rate, in this case is 35%.