Question

A firm is considering purchasing a new machine, which costs $600,000 and has a six-year life, a CCA rate of 25 percent and an expected salvage value of $40,000. The asset class will remain open. The project will generate sales revenue of $200,000 in the first year, which will grow at 6 percent per year in the subsequent years. Variable costs will be $80,000 for the first year, which will grow at 7 percent per year. The firm's marginal tax rate is 35 percent and required return is 10 percent. Should the project be accepted?

Preferred using Excel as the answer

Answer 1

Revenue year 1		200,000.00
Variable cost		80,000.00
		120,000.00
CCA	600000*25/100	150,000.00
Net loss 1st year			-30,000.00
Revenue year 2		212,000.00
Variable cost		85,600.00
		126,400.00
CCA	600000-150000*25/100	112,500.00	13,900.00
Carried forward loss			30,000.00	-16,100.00
Revenue year 3		224,720.00
Variable cost		91,592.00
		133,128.00
CCA	600000-150000-112500*25/100	84,375.00	48,753.00
Carried forward loss			16,100.00
			32,653.00
Income tax			11,428.55
Net profit				21,224.45
Revenue year 4		238,203.20
Variable cost		98,003.44
		140,199.76
CCA	316,406.25	63,281.25
Profit		76,918.51
Income tax		26,921.48
Net profit		49,997.03		49,997.03
net profit in 4 years	55,121.48
Salvage value of machinery	40,000.00
Total profit	95,121.48
Required Return 10%	60,000.00
THE PROJECT SHOULD BE ACCEPTED