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