18) The Toronto Deli & Cafeteria adjoins a large university and receives mostly student customers. It recently purchased a new electronic scanner for student debit card purchases at a cost of $20,000. Amortization has been recorded for one year with six more years remaining. The cafeteria owner has just returned from a trade show where several new scanners were on display. One of the new models, which would be appropriate for the cafeteria, has a cost of $30,000. It has a useful life of 10 years. The manufacturer of the new model predicts that it will result in annual savings of 20 percent over the current operating costs.
a.Since the current machine is only one year old, should the owner even consider replacing it with the new model? Explain.
b.What are the relevant items to be considered from a capital budgeting perspective in replacing the old machine with the new one?
c.Which of the relevant items have related tax effects?
19) Melvin, Otto, and Clapman consulting firm is considering the purchase of a new telephone system for $10,000. It is believed that the new equipment will save $750 a year over current costs. Telephone equipment is included in Class 3 for tax purposes. Class 3 CCA rate is 5%. The new equipment has an estimated life of five years. Its salvage value is estimated at $400 at the end of five years.
What items must be considered in the analysis of the purchase?