The Jagged Pill Ltd. has placed a $60,000 nonrefundable deposit on a new venture. The deposit can be expensed immediately. This has entitled Jagged Pill to additional information (of a trade-secret variety) and allows Jagged Pill to purchase a unique machine for an additional $525,000.
From the information revealed, it is projected that the expected life of the machine and this venture is eight years. At that time, the machine could be salvaged for an estimated $30,000. An additional capital upgrading of the machine costing $105,000 is anticipated in four years.
Projected annual cash flows before taxes and amortization for the venture are $165,000. If purchased, this unique machine will join the ongoing Class 8 pool with a CCA rate of 20 percent.
Jagged Pill's corporate tax rate is 25 percent. Its cost of capital is 13 percent.
a. Calculate the NPV for this new venture.
b. Calculate the IRR for this new venture.
c. Calculate the PI of this new venture.
d. Should The Jagged Pill Ltd. proceed with the new venture and equipment purchase?