A proposed cost-saving device has an installed cost of $60,500. It is in class 9 for CCA purposes. (CCA rates are given in Table 8A.1 in Appendix 8A.) It will actually function for six years, at which time it will have no value. When this project is over, there will still be other assets in the CCA class. There are no working capital consequences from the investment; the tax rate is 41 percent.
a. What must the annual pre-tax cost savings be for a company to favour the investment? The company requires a 13 percent return. Hint: This is a variation on the problem of setting a bid price.
b. Suppose the device will be worth $21,000 in salvage (before taxes). How does this change your answer?