ASSIGNMENT #3 Question 1 (3 marks) You are evaluating two different pollution control devices: (a) A filtration system which costs $1.1 million to install and $60,000 annually to operate. It would have to be replaced every five years. (b) A precipitation system which costs $2.1 million to install, but only $8,000 per year to operate. The precipitation equipment has an operating life of seven years. The company rents its factory and both systems are considered leasehold improvements so straight- line capital cost allowance is used throughout, and neither system has any salvage value. Which system should the company select if the cost of capital is 12% and the tax rate is 40%? Ignore the half-year rule. We calculated the EAC for the filtration system in class. For your assignment, calculate the EAC for the precipitation system. Question 2 (7 marks) The Triple-A Manufacturing Co. is considering the purchase of a machine. The machine will cost a total of $50,000 and has an expected useful life of 6 years. The company's cost of capital is 12% and the inflation rate in Canada is expected to be 6% annually for the foreseeable future. The following projections are made: The machine will produce 8,000 units annually. In the first year, each unit will sell for $5.00. Subsequent increases in the selling price are expected to be 5 percent per year. Labour costs of $10,000 in the first year of operations are expected to rise by 10 percent each year. Materials will cost $12,000 in the first year and will rise by 6 percent annually. Other expenses total $1,500 in the first year and will rise by 2 percent a year. Corporate taxes are 40 percent. The appropriate CCA rate is 30 percent. Should the company purchase the new machine? Follow the "template" (the "nominal dollar approach" on page 4 of the class notes) and then compute the NPV. [You can Excel.] Question 2 (7 marks) If you use Excel, just attach the printout instead of this page. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6