As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the cost of capital at 15 percent for all proposed projects. As a small business, GI pays corporate taxes at the rate of 35 percent.
The proposed capital project calls for developing new computer software to facilitate partial automation of production in GI's plant. Alternative A has initial software development costs projected at $185,000, while Alternative B would cost $320,000. Software development costs would be capitalized and qualify for a capital cost allowance (CCA) rate of 30 percent. In addition, IT would hire a software consultant under either alternative to assist in making the decision whether to invest in the project for a fee of $16,000 and this cost would be expensed when it is incurred.
To recover its costs, GI's IT department would charge the production department for the use of computer time at the rate of $375 per hour and estimates that it would take 182 hours of computer time per year to run the new software under either alternative. GI owns all its computers and does not currently operate them at capacity. The information technology (IT) plan calls for this excess capacity to continue in the future. For security reasons, it is company policy not to rent excess computing capacity to outside users. If the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows:

Year	Alternative A	Alternative B
1	$88000	$118000
2	$90000	$125000
3	66000	100000
4	55000	95000
5	50000	55000

Identify and list all relevant and non-relevant costs to the Capital Budgeting Decision and why did you select these as relevant or non-relevant?

Answer rating: 100% (QA)

GLENCOLIN INTERNATIONAL As a financial analyst at Glencolin International GI you have been asked to ... View the full answer