Question 3 (8 marks)

The Triple-A Manufacturing Co. is considering the purchase of a machine. The machine will cost a total of $50,000 and has an expected useful life of 6 years. The companys cost of capital is 12% and the inflation rate in Canada is expected to be 6% annually for the foreseeable future. The following projections are made:

• The machine will produce 8,000 units annually.
• In the first year, each unit will sell for $5.00.
• Subsequent increases in the selling price are expected to be 5 percent per year.
• Labour costs will be $10,000 in the first year of operations are expected to rise by 10 percent each year.
• Materials will cost $12,000 in the first year and will rise by 6 percent annually.
• Other expenses total $1,500 in the first year and will rise by 2 percent a year.
• Corporate taxes are 40 percent.
• The CCA rate is 30 percent.

Should the company purchase the new machine? Follow the template (example on page 4 of the inflation handout)- i.e., the long way- and then compute the NPV. If you use excel, cut and paste it into your word file (as the last page of the assignment).

Question 3 (8 marks)

If you use Excel, cut and paste it into your word file; if you do it manually, include in your pdf file.

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