Bedford Company Ltd. operates a commercial fleet of fishing vessels off the south shore of Nova Scotia.
Question:
Bedford Company Ltd. operates a commercial fleet of fishing vessels off the south shore of Nova Scotia. Bedford is considering a proposal to do some of its routine maintenance work itself rather than contracting out all of its maintenance. The proposal will require Bedford to buy a $300,000 machine that will be depreciated over its three-year useful life on a straight-line basis to a market salvage value of $50,000. Bedford will also need to make an initial investment in additional inventory of $75,000. The proposal is expected to result in pre-tax savings to the company of $200,000 per year. Bedford’s tax rate is 20%, its cost of capital is 16% and the applicable CCA rate on the machine is 25%. Based on this information, what is the NPV of the asset that would indicate that Bedford should accept the proposal?
a) $40,742
b) $94,580
c) $102,392
d) $184,416
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-0078111044
16th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello