Your company, is analyzing a potential opportunity to cut costs.  It can spend $1,950,000 today on the purchase and $ 15,000 on the installation of a new automated processing line.  The equipment will have a six-year life, at which time it can be sold for $378,000.  The equipment qualifies as a Class 8 asset with a 10% CCA rate.  Since the equipment was be purchased in 2017, it was subject to the half-year rule.  The benefit of installing the new equipment is a reduction in labor costs of $800,000 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 45% corporate tax rate and it wants a 20% return.  Should they undertake this cost-cutting program? 

 

What is the NPV for the project? 

Answer rating: 100% (QA)

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