1. A university student painter is considering the purchase of a new air compressor and paint gun to replace an old paint sprayer. (Both items belong to Class 9 and have a 25% CCA rate). These two new items cost $12,000 and have a useful life of four years, at which time they can be sold for $1,600. The old paint sprayer can be sold for $500 and could be scrapped for $250 in four years. The student believes that operating revenues will increase annually by $8,000. Should the purchase be made? The tax rate is 22% and the required rate of return is 15%. 2. consider the following two mutually exclusive projects:

Year Cash Flow (X) Cash Flow (Y)

0 -$20,000 -$20,000

1 8,850 10,100

2 9,100 7,800

3 8,800 8,700

Instruction:

Sketch the NPV profiles for X and Y over a range of discount rates from 0% to 25%. What is the crossover rate for these two projects (when both projects have the same NPV)? Show your steps.