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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
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? 0-$400,000 O-$1,500,000 -$1,525,000 O-$250,000 O-$25,000 What is the correct value for Step #2? O+$1,124,523 O+$931,143 O+$985,268 O+$1,059,655 O+$1,097,511 What is the correct value for Step #3? O+$273,913 O+$266,122 O+$284,664 O+$243,750 O+$250,250 What is the correct value for Step #4? O+$94,123 O+$101,875 O+$108,082 +$89,332 +$83,724 What is the correct value for Step #5? 0-$12,559 O-$13,447 O-$16,221 0-$17,889 O-$18,528 What is the correct value for Step #6? 0-$15,745 O-$14,192 0-$16,628 0-$15,211 0-$15,995 Based on your answers to the first six questions, what is the appropriate course of action to follow? OAccept - the NPV is positive OReject - the NPV is positive Accept - the NPV is negative OReject - the NPV is negative
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