Baroque Ltd. is currently considering the replacement of its old and relatively inefficient electronic data processing equipment with new technology. If needed, the existing equipment could also remain function for the next three years, but it has no resale value, now or at the end of the three years, because of its obsolescence. The new equipment and systems software, which will cost $2 million to purchase and instal has an estimated useful life of three years. The new technology is expected to have a resale value that is 25% of its original cost at the end of the three years. If the new electronic data processing system is installed, management believes that revenues can be increased by $1.75 million annually, while the cost of goods sold is expected to remain constant at 60% of revenues. Annual system-operating costs will be $500,000 lower with the new equipment than with the existing equipment. As a result of the increased sales volume, management believes that working capital needs will also increase by $225,000. Baroque's tax rate is 25%, its cost of capital is 12%, and this is an average-risk project for Baroque. This equipment ha an applicable CCA rate of 55%, declining balance. The equipment is eligible for the Accelerated Investment
Baroque Ltd. is currently considering the replacement of its old and relatively inefficient electronic data processing equipment with new technology. If needed, the existing equipment could also remain function for the next three years, but it has no resale value, now or at the end of the three years, because of its obsolescence. The new equipment and systems software, which will cost $2 million to purchase and instal has an estimated useful life of three years. The new technology is expected to have a resale value that is 25% of its original cost at the end of the three years. If the new electronic data processing system is installed, management believes that revenues can be increased by $1.75 million annually, while the cost of goods sold is expected to remain constant at 60% of revenues. Annual system-operating costs will be $500,000 lower with the new equipment than with the existing equipment. As a result of the increased sales volume, management believes that working capital needs will also increase by $225,000. Baroque's tax rate is 25%, its cost of capital is 12%, and this is an average-risk project for Baroque. This equipment ha an applicable CCA rate of 55%, declining balance. The equipment is eligible for the Accelerated Investment
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter12: Capital Investment Decisions
Section: Chapter Questions
Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...
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Transcribed Image Text:Baroque Ltd. is currently considering the replacement of its old and relatively inefficient electronic data
processing equipment with new technology. If needed, the existing equipment could also remain functional
for the next three years, but it has no resale value, now or at the end of the three years, because of its
obsolescence. The new equipment and systems software, which will cost $2 million to purchase and install,
has an estimated useful life of three years. The new technology is expected to have a resale value that is
25% of its original cost at the end of the three years. If the new electronic data processing system is
installed, management believes that revenues can be increased by $1.75 million annually, while the cost of
goods sold is expected to remain constant at 60% of revenues. Annual system-operating costs will be
$500,000 lower with the new equipment than with the existing equipment. As a result of the increased
sales volume, management believes that working capital needs will also increase by $225,000. Baroque's
tax rate is 25%, its cost of capital is 12%, and this is an average-risk project for Baroque. This equipment has
an applicable CCA rate of 55%, declining balance. The equipment is eligible for the Accelerated Investment
Incentive of 1.5 times the CCA rate in the year of acquisition and immediate expensing rules for tax purposes
with a limit of $1.5 million per year. Assume there are still assets remaining in the UCC class and that there is
a positive balance in the class even after the salvage proceeds are deducted. Required: Using the net
present value (NPV) method, determine whether Baroque should replace its equipment with the new
technology.
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