Problem 2 EM Industries is considering a new project involving the acquisition of a new machine that
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Problem 2 EM Industries is considering a new project involving the acquisition of a new machine that would replace an older machine currently in use. The new machine costs $750,000 (at t-0) and can be sold at the end of its expected 4-year operating life for $100,000 (at t-4). The new machine takes up more space and EM will need to move maintenance and cleaning supplies that used to be stored next to the machine to a small storage room that could otherwise be sublet for $25,000 a year (at tl to t-4). The old machine was bought 3 years ago for $700,000 and can be sold for S150,000 today or for $50,000 in 4 years. Both, the old and the new machine belong to asset class 43 with a CCA rate of 30%. Management believes that the company will have other class 43 assets in four years when the equipment would be sold. EM Industries has just paid $55,000 for a study which indicates that the new machine will reduce annual manufacturing expenses by $200,000 per year (at t- to t4. Since the new machine is more reliable, the plant will need to keep fewer spare parts in stock. Management expects that inventory levels can be reduced by S35,000 (at t-0) when the new machine is installed (note, at the end of the project, this change in net working capital will be reversed, i.e., inventory levels will increase again by S35,000 at the end of year 4). EM's marginal tax rate is 35%, and its required rate of return (RRR) is 13% a) What is the initial cash outlay (the total cash flow at t-0)? b) What is the second year's cash flow (excluding the CCA Tax Shield)? c) What is the last year's cash flow (excluding the CCA Tax Shield)? d) What is the year 3 CCA? e) What is the PV CCA Tax Shield? f) What is the NPV of the replacement project?
Related Book For
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook
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