Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the
Question:
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and save $1,500 a year in expenses. If the old washer is retained, it will also last for 6 more years after which it will have to be junked. The washers fall into an asset class with a CCA rate of 30%. Bottoms Up owns other washing machines that also fall into this asset class. The opportunity cost of capital is 15%, and the firm's tax rate is 40%.
a. If the salvage value of the washer is expected to be zero at the end of its 6-year life, what are the cash flows of the project in years 0 to 6?
b. What is the project NPV?
c. What will the NPV and IRR be if the firm uses straight-line depreciation with a 6-year tax life?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781259087585
6th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan, Gordon Roberts