Candy Inc. wants to purchase a new brewing vat for $20,000, including $1,500 of installation costs. The

Question:

Candy Inc. wants to purchase a new brewing vat for $20,000, including $1,500 of installation costs. The old vat was bought five years ago and had an expected economic life of 10 years without salvage value. The old vat nowhas a book value of $2,000, and Candy Inc. expects to sell it for $2,000. The new vat would decrease operating costs by $8,000 each year of its economic life. The straight-line depreciation method would be used for the new vat, for a five-year period with no salvage value. The company’s tax rate is 30%, the cost of capital is 10%, and the CCA is 20%.

Required:

1. Determine the payback period.

2. Compute the simple rate of return.

3. Calculate the net present value.

4. State whether the new brewing vat should be purchased.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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