Cost Cutting: CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1.5 Million today on the purchase and installation of a new automated processing line. The equipment will have a six-year life, at which time it can be sold for $250,000. The equipment qualifies as a Class 8 asset with a 20% CCA rate. Since the equipment will be purchased in 2020, it is subject to the Accelerated Investment Incentive rules, rather than the half-year rule. The benefit of installing the new equipment is a reduction in labor costs of $400,000 per year. The new process will lead to an immediate increase in Net Working Capital (NWC) of $25,000, which will be recovered at the conclusion of the project. The firm has a 30% corporate tax rate and it wants a 15% return. Should they undertake this cost-cutting program?

What is the correct value for Step #1-#6? ?(Value for each Step) Should they accept or reject? Is the NPV positive or negative?

Multiple Choice

MC	Step 1	Step 2	Step 3	Step 4	Step 5	Step 6
A	$1,500,000	$1,366,245	$376,650	$123,690	$16,412	-$15,648
B	$1,525,000	$1,059,655	$452,640	$98,654	$17,397	$17,369
C	$250,000	$1,263,755	$650,545	$108,082	$20,635	-$14,192
D	$400,000	$1,135,950	$273,913	$85,631	$18,528	-$18,354

Setting a Bid Price: CBD Inc, a processor of CBD oils, has asked you to help it determine a bid price for a RFQ (Request for Quotation) it has received from the Province of BC. The Province is looking for a Licensed Producer (LP) to supply it with 600,000 bottle of CBC oil each year for the next five years. In order to undertake this project, the firm will have to install a new bottling line at a cost of $250,000. This will be considered as a Class 8 asset with a 20% CCA rate and is subject to Accelerated Investment Incentive rules. The firm does not foresee selling the new bottling line at any time in the near future so it has not estimated a salvage value. Annual productions costs are estimated as follows: variable costs per bottle of $5.00 and fixed costs of $150,000. The firm expects the new contract would lead to an immediate increase of $40,000 in NWC, which will be recovered at the end of the project. The firm has a 30% tax rate and it wants a 15% return. What bid price should it submit?

What is the correct value for Step #1-#6?(Value for each Step) Whats the appropriate course of action to follow? Submit a bid price?

MC	Step 1	Step 2	Step 3	Step 4	Step 5	Step 6
A	$255,000	$6,654,389	$45,460	-$10	$25	-$20,113
B	$295,000	$5,639,45	$45,460	$10	$20	$25,369
C	$250,000	$6,218,248	$46,950	$0	$0	$27,630
D	$270,000	$6,861,321	$46,876	$20	$15	-$24,652