Question
1. Peter is considering the purchase of one of two machines used in his industrial plant. Machine PP has a life of two years, costs
1. Peter is considering the purchase of one of two machines used in his industrial plant. Machine PP has a life of two years, costs $52 initially, and then $60 per year in maintenance costs. Machine QQ has a life of three years, costs $82 initially, and requires $50 in annual maintenance costs. Either machine must be replaced at the end of its life. Which is the better machine for the firm? Explain. The discount rate is 12% and the tax rate is zero. (4 marks)
2. A new watch project for the Omegga company has the following data. The estimated sales price of the new watch is $200 and the sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed costs are $135,000 per year. The project requires an initial investment of $178,000, which is depreciated straight-line to zero over the three-year project life. The actual market value of the initial investment at the end of year 3 is $52,000. Initial net working capital investment is $57,000 and NWC will maintain a level equal to 18% of sales each year thereafter. The tax rate is 35% and the required return on the project is 11%. Given the $57,000 initial investment in NWC, what change occurs for NWC during year 1? Explain. (4 marks)
3. KKF Inc. is considering a 3-year project with an initial cost of $755,000. The project will not directly produce any sales but will reduce operating costs by $195,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $42,000. The tax rate is 30%. The project will require $28,000 in extra inventory for spare parts and accessories. Calculate the NPV. Should this project be implemented if KKF requires a 10% rate of return? Why or why not? (4 marks)
4. New equipment costs $645,000 and is expected to last for four years with no salvage value. During this time, the company will use a 30% CCA rate. The new equipment will save $155,000 annually before taxes. If the company's required rate of return is 12%, determine the PVCCATS of the purchase. Assume the half-year rule applies and a tax rate of 33%. (3 marks)
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