Allstream Products Inc. wants to increase its production capacity and improve the quality of the only product it manufactures. For that purpose, the CEO is considering acquiring new digital equipment that will automate the production process while ensuring a better and more consistent quality of product. The new equipment would cost $1,400,000 and replace the old equipment that is currently used. Working capital of $60,000 is required of which 30% would be recovered. The old equipment was acquired 6 year ago at a cost of $850,000 and is being depreciated over 8 years using the straight one method. It was expected that, after 8 years, the salvage value would be zero, but I can be sold now for $212,500. The new equipment will be used for 8 years, with and expected salvage value of $80,000 at the end of its useful life. The capital cost allowance for the new equipment is 20%.

The companys tax rate is 40% and its required before tax return on all investments is 15%.

The new equipment should generate saving of 10% on all variable production costs. The following data provides information about the current production and sales of the product:

Annual production and sales volume in units 110,000 Sales price per unit $70 Production cost per unit:

Direct materials $12 Direct labour $15 Overhead (60% fixed) $10

Total $37

REQUIRED:

1. Should Allstream Products Inc. proceed with the purchase of the new equipment using NPV method? (14 marks)

2. Based on your answer to part 1), state whether or not Allstream Products should proceed with the investment. Identify other factors that the CEO should consider before making a final decision and explain how they could affect the investment decision. (2 marks)