A company is planning to purchase a new machine. The cost of the new machine is $800,000,

Question:

A company is planning to purchase a new machine. The cost of the new machine is $800,000, and the company will incur a one-time cost of $90,000 to train new staff to operate it. Cash flows before tax are estimated at an average of $180,000 per year. The useful life of the machine is 15 years, and no salvage value is expected. The company’s cost of capital is 12%, its income tax rate is 40%, and its CCA rate is 10%.

Required:

1. What is the present value of the cash flows of the new machine?

2. What is the present value of the CCA tax saving of the new machine?

3. What is the payback period of the new machine?

Salvage Value
Salvage 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... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...

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