Problem
Fireplaces Inc. is considering replacing some old equipment. The old equipment was purchased a number of years ago for $75,000. The market value of the old equipment today is $50,000 and the salvage 5 years from now will be $15,000. The new equipment costs $100,000 today and could be sold at the end of 5 years for $35,000. An additional $4,000 in net working capital is required and will be released at the end of the project. The new equipment is estimated to generate $25,000 in annual operating income, compared with $12,000 per year for the old equipment. Assume the tax rate = 35%, CCA rate of 30% and cost of capital of 14%. Assume the Accelerated Investment Incentive applies. Estimate the NPV of the replacement decision and decide whether or not the replacement should occur.