CAPITAL BUDGETING WITH INCOME TAXES 2 Montreal Paper Company must purchase a paper sorter to replace its existing one on January 1, 2022. 3 This is an essential investment because manual sorting is too demanding and causes physical problems for employees. 4 Two models that would adequately meet the company's needs are the price and Allen models. 5 Information related to each model includes: 7 $ $ Price 50,400 $ 20,000 $ $ 8 24,000 $ Allen 100,800 25,000 10,000 8 40,000 Cost of machines Working Capital needed Salvage value Life - years Annual savings of operating costs CCA Income Tax rate After-tax cost of capital $ 10 11 12 13 14 15 16 $ 30% 2596 1296 7 Required: A Compute the after-tax net present value, internal rate of return, payback periods and profitability index for both models using the total cost approach. 3 C0 Price Allen YEAR YEAR E1 2 Annual Net Cash Flow Annual Net Cash Flow -4 -5 -6 =7 28 1/1/22 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28 12/31/29 12/31/29 1/1/22 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28 12/31/29 12/31/29 0 =1 1 2 3 4 =5 5 6 =7 YEAR CCA SCHEDULE -507 BASIS CCA SCHEDULE -507 BASIS ADD'N CCA CCA RATE ADD'N YEAR OPEN UCC END UCC OPEN UCC CCA RATE CCA END UCC -0 -1 -2 3 -4 -5 2022 2023 2024 2025 2026 2027 2028 2029 2022 2023 2024 2025 2026 2027 2028 2029 CALCULATE CASH FLOW AFTER TAX (CFAT) CFAT Payback CFAT Payback 45 46 47 CALCULATE CASH FLOW AFTER TAX (CFAT) 48 49 YEAR 50 1/1/22 51 12/31/22 52 12/31/23 53 12/31/24 54 12/31/25 55 12/31/26 56 12/31/27 57 12/31/28 58 12/31/29 59 12/31/29 60 61 Net Present Value 62 63 64 Internal Rate of Return 65 66 67 Payback year 68 69 70 Profitability Index 71 72 8 Which investment would you recommend? 78 YEAR 1/1/22 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28 12/31/29 12/31/29 Net Present Value Internal Rate of Return Payback year Profitability Index 72 B Which investment would you recommend? 73 74 C Explain why have you made this recommendation 75 76 78 79 80
