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CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1.5 Million today on the purchase and

CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1.5 Million today on the purchase and installation of a new automated processing line. The equipment will have a six-year life, at which time it can be sold for $250,000. The equipment qualifies as a Class 8 asset with a 20% CCA rate. Since the equipment will be purchased in 2020, it is subject to the Accelerated Investment Incentive rules, rather than the half-year rule. The benefit of installing the new equipment is a reduction in labor costs of $400,000 per year. The new process will lead to an immediate increase in Net Working Capital (NWC) of $25,000, which will be recovered at the conclusion of the project. The firm has a 30% corporate tax rate and it wants a 15% return. Should they undertake this cost-cutting program?

What is the correct value for Step #1?

  • A) $250,000 B) $400,000 C) $1,500,000 D) $1,525,00

  • What is the correct value for Step #2?

  • A) $1,059,655 B) $1,135,950 C) $1,366,245 D) $1,263,755

What is the correct value for Step #3?

  • $376,650

  • $650,545

  • $273,913

  • $452,640

What is the correct value for Step #4?

  • $108,082

  • $123,690

  • $85,631

  • $98,654

What is the correct value for Step #5?

  • $20,635

  • $16,412

  • $18,528

  • $17,397

What is the correct value for Step #6?

  • -$18,354

  • $17,369

  • -$15,648

  • -$14,192

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The step value is whether they should undertake the project by year end value

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