Cost Cutting: a company can spend $1,7500,000 today on the purchase and installation of a new automated equipment that has a potential opportunity to cut costs. The equipment will have a nine-year life, at which time it can be sold for $134,000. 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 material costs of $280,000 per year. The new process will lead to an immediate increase in Net Working Capital (NWC) of $47,000, which will be recovered at the conclusion of the project. The firm has a 25% corporate tax rate and it wants a 17% return. Should they buy this cost-cutting equipment? What is the correct value for Step #4/#5?

Step #4: Calculate the PV of salvage

Step #5: Calculate the PV of the tax shield from CCA lost due to salvage

Step #6: Calculate the PV of the change in NWC