Question

Cost Cutting: CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1.5 Million today on the purchase and installation of a new automated processing line. The equipment will have a six-year life, at which time it can be sold for $250,000. The equipment qualifies as a Class 8 asset with a 20% CCA rate. Since the equipment will be purchased in 2020, it is subject to the Accelerated Investment Incentive rules, rather than the half-year rule. The benefit of installing the new equipment is a reduction in labor costs of $400,000 per year. The new process will lead to an immediate increase in Net Working Capital (NWC) of $25,000, which will be recovered at the conclusion of the project. The firm has a 30% corporate tax rate and it wants a 15% return. Should they undertake this cost-cutting program?

answers of step 1 is 1525, 000 which is the PV of the initial cost

answer for step 2 is $1,059,655 which is the PV of the after-tax incremental operating cash flows from undertaking the project

What is the correct value for Step #3? Calculate the PV of the tax shield from CCA.

A. $273,913. B)$452,640. C) $650,545. D) $376,650

What is the correct value for Step #4? Calculate the PV of salvage

A) 123,690 B) 98654. C)108,082. D) 85,631

What is the correct value for Step #5?  Calculate the PV of the tax shield from CCA lost due to salvage

A) $16,412. B) $18,528. C). $20,635. D) $17,397

Answer 1