ADM 2350 SECTIONS A, B, & C
Assignment #3 Revised Solutions
This assignment is due at the
of the lab on Wednesday,
November 14, 2007 for Section C and Friday, November 16, 2007 for Sections A & B.
It is your
responsibility to hand in your assignment directly to the tutor for lab associated with the
section in which you are registered.
Please do not hand in your assignment in the wrong lab or to
the professor. This assignment counts 5% of your course grade. You are encouraged to work on this
assignment in teams of up to 5 students
from the same section of this course.
may turn in an individual assignment if you prefer.
Each assignment must be typed and contain the
student name(s) and student number(s) on each page. A statement of integrity must be attached to
each assignment. Each individual whose name appears on the assignment must sign the statement
of integrity. See p. 8 of the course syllabus for the integrity statement.
1. Sam’s Machine Shop purchased an automated drill press 5 years ago that had an estimated
economic life of 14 years. The drill press originally cost $200,000, was placed in class 10 with a CCA
rate of 30 percent, and has a current undepreciated capital cost of $40,817. The actual market value
of this drill press is $60,000. The firm is considering replacing the drill press with a new one costing
$140,000. Shipping and installation charges will add an additional $20,000 to the cost. The new
machine will also be placed in class 10. The new machine is expected to have a 9-year economic life.
The net salvage value of the new machine in nine years is estimated to be $30,000. If kept, the old
machine has an estimated net salvage value of $10,000 in nine years. The firm’s current marginal tax
rate is 40 percent. The firm’s project cost of capital for this replacement decision is 20 percent. The
firm’s initial incremental net working capital would increase by $2,000 as a result of replacing the drill
press. Annual revenues during the project’s first year would increase from $80,000 to $100,000 if the
new drill press were purchased. After the first year, revenues from the new project are expected to
increase at a rate of $10,000 a year for the remainder of the project life. The required incremental net
working capital will be $1,000 at the end of each year for years 1 through 8. The cumulative increase
in incremental net working capital of $10,000 = [$2,000 initial increase + (8)($1,000)] will be returned