Question: The Hub Store at a university in eastern Canada is

The Hub Store at a university in eastern Canada is considering purchasing a self-serve check- out machine similar to those used in many grocery stores and other retail outlets. Currently the university pays part-time wages to students totalling $55,000 per year. A self-serve check-out machine would reduce part-time student wages by $35,000 per year. The machine would cost $240,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,000 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,000. The salvage value of the checkout machine in 10 years would be $40,000. The CCA rate is 30%. Management requires a 10% after-tax return on all equipment pur- chases. The company’s tax rate is 30%.
1. Determine the before-tax net annual cost savings that the new checkout machine will provide.
2. Using the data from (1) above and other data from the exercise, compute the checkout machine’s net present value. Would you recommend that the machine be purchased?

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  • CreatedJuly 08, 2015
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