Question

You are considering the purchase of a machine with an expected life of 3 years. It costs $800,000 and belongs to class 10 (CCA rate = 30%). Its estimated market value at the end of 3 years equals $125,000. The number of products you expect to sell over the next 3 years is 20,000, 25,000 and 20,000 in years 1, 2 and 3, respectively. Expected selling price per unit is $100 while annual production costs consist of $50,000 in fixed costs and an additional $80 per unit in variable costs. Working capital required equals $30,000 in year 0, and 10% of sales in years 1 through 3. Working capital will be recaptured at the end of year 3. The corporate tax rate is 40%, and the required rate of return for such projects equals 10%. Should you buy the machine?

Answer 1