Question
Cost Cutting : CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1,500,000 today on the
Cost Cutting: CBD Inc, a processor of CBD oils, is analyzing a potential opportunity to cut costs. It can spend $1,500,000 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 20% return. Should they undertake this cost-cutting program?
What is the correct value for Step #1?
-$400,000
-$1,500,000
-$1,525,000
-$250,000
-$25,000
What is the correct value for Step #2?
+$1,124,523
+$931,143
+$985,268
+$1,059,655
+$1,097,511
What is the correct value for Step #3?
+$273,913
+$266,122
+$284,664
+$243,750
+$250,250
What is the correct value for Step #4?
+$94,123
+$101,875
+$108,082
+$89,332
+$83,724
What is the correct value for Step #5?
-$12,559
-$13,447
-$16,221
-$17,889
-$18,528
What is the correct value for Step #6?
-$15,745
-$14,192
-$16,628
-$15,211
-$15,995
Based on your answers to the first six questions, what is the appropriate course of action to follow?
Accept the NPV is positive
Reject the NPV is positive
Accept the NPV is negative
Reject - the NPV is negative
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