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?

What is the correct value for Step #1-#6? ?(Value for each Step) Should they accept or reject? Is the NPV positive or negative?

Answer 1

formulas used:-

year	Depriciation	exp. Saving	Profit Befor tax	Profit after tax	Operating Cashflow	NWC	Total Cashflow
0						-25000	=-1500000+G3
1	=1.5*1000000*20%	400000	=C4-B4	=D4*(1-30%)	=E4+B4		=F4
2	=B4*(1-20%)	400000	=C5-B5	=D5*(1-30%)	=E5+B5		=F5
3	=B5*(1-20%)	400000	=C6-B6	=D6*(1-30%)	=E6+B6		=F6
4	=B6*(1-20%)	400000	=C7-B7	=D7*(1-30%)	=E7+B7		=F7
5	=B7*(1-20%)	400000	=C8-B8	=D8*(1-30%)	=E8+B8		=F8
6	=B8*(1-20%)	400000	=C9-B9	=D9*(1-30%)	=E9+B9	25000	=F9+G9+250000
					Required Rate	0.15
					NPV	=NPV(G11,H4:H9)+H3

Project should not be accepted as it has negative NPV