The Canadian company Encircled Ltd makes thoughtfully designed, versatile capsule wardrobe essentials. All fabrics are thoughtfully...

Transcribed Image Text:

The Canadian company Encircled Ltd makes thoughtfully designed, versatile capsule wardrobe essentials. All fabrics are thoughtfully chosen to meet the company's high standards in wearability and sustainability. To improve the production process, the management decided to replace the existing tagging machine with a new one. The new tagging machine would cost $780,000, would last 6 years, and would have a salvage value of $52,000. It would qualify as a CCA class 8 (20% CCA) asset. The existing tagging equipment currently has a net book value of $180,000 and could be sold for $165,000. If kept, the old equipment would have a salvage value $17,000 in 6 years. The new tagging machine is expected to lower direct labour costs by $42,800 per year. The current variable overhead rate is 115% of direct labour. Other annual cost savings are projected to be $35,000. Due to the reduction in the production cycle time, working capital requirements will decrease by $150,000 during the life of the new machine. Assume that the marginal tax rate is 35% and that the cash flows occur at the end of the year. Required: 1. Calculate the net present value of replacing the existing equipment at a 14 percent required rate of return. Show all supporting calculations/work. (16 marks) 2. Based on your calculations in part 1, would you recommend replacing the tagging machine? Why or why not? What other factors would you suggest taking into consideration when making the decision? Why? (4 marks) The Canadian company Encircled Ltd makes thoughtfully designed, versatile capsule wardrobe essentials. All fabrics are thoughtfully chosen to meet the company's high standards in wearability and sustainability. To improve the production process, the management decided to replace the existing tagging machine with a new one. The new tagging machine would cost $780,000, would last 6 years, and would have a salvage value of $52,000. It would qualify as a CCA class 8 (20% CCA) asset. The existing tagging equipment currently has a net book value of $180,000 and could be sold for $165,000. If kept, the old equipment would have a salvage value $17,000 in 6 years. The new tagging machine is expected to lower direct labour costs by $42,800 per year. The current variable overhead rate is 115% of direct labour. Other annual cost savings are projected to be $35,000. Due to the reduction in the production cycle time, working capital requirements will decrease by $150,000 during the life of the new machine. Assume that the marginal tax rate is 35% and that the cash flows occur at the end of the year. Required: 1. Calculate the net present value of replacing the existing equipment at a 14 percent required rate of return. Show all supporting calculations/work. (16 marks) 2. Based on your calculations in part 1, would you recommend replacing the tagging machine? Why or why not? What other factors would you suggest taking into consideration when making the decision? Why? (4 marks)

Answer rating: 100% (QA)

Question 1 Cost of New Tagging Machine 780000 Salvage Value of New Tagging Machine 52000 Sale of Exi... View the full answer