Cost Cutting: Your company, is analyzing a potential opportunity to cut costs. It can spend $1,750,000 today on the purchase and $ 10,000 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 $278,000. The equipment qualifies as a Class 8 asset with a 20% 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 $700,000 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 35% corporate tax rate and it wants a 18% return. Should they undertake this cost-cutting program? What is the NPV for the project?
Cost Cutting: Your company, is analyzing a potential opportunity to cut costs. It can spend $1,750,000 today on the purchase and $ 10,000 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 $278,000. The equipment qualifies as a Class 8 asset with a 20% 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 $700,000 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 35% corporate tax rate and it wants a 18% return. Should they undertake this cost-cutting program? What is the NPV for the project?
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 2E: Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment...
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Cost Cutting: Your company, is analyzing a potential opportunity to cut costs. It can spend $1,750,000 today on the purchase and $ 10,000 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 $278,000. The equipment qualifies as a Class 8 asset with a 20% 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 $700,000 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 35% corporate tax rate and it wants a 18% return. Should they undertake this cost-cutting program?
What is the NPV for the project?
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