Dunbar Inc. produces widgets.Due to high demand for widgets, the company is thinking of investing in an updated piece of production equipment that will replace the equipment currently being used.The current equipment was purchased five years ago for $500,000.It could continue to be used for another five years. It has an annual practical capacity of 50,000 units per year and is operating at full capacity. It is being amortized on a straight-line basis for accounting purposes.

The revenues and costs associated with the current production are as follows:

Unit selling price$12.00

Variable costs per unit:

Direct materials$ 4.00

Direct labour$ 1.00

Manufacturing overhead$ 2.00

Selling and administration10% of unit selling price

Fixed manufacturing costs$100,000 per year

Fixed administration costs$ 40,000 per year

The new equipment will increase capacity to 60,000 units.The unit selling price will not change as the company is a price taker.However, labour costs will fall by 10% and variable manufacturing overhead will decrease by 25%.Dunbar is confident it will be able to sell all of the additional units it can produce.

The equipment will cost $300,000.It is expected to last for five years at which time it will be sold for $70,000.The old equipment could be sold today for $50,000 but will have no residual value in five years. The equipment is classified as a Class 8 asset for tax purposes and the CCA rate is 20%.The company has a marginal income tax rate of 40% and its cost of capital is 10%.

Should Dunbar invest in the new equipment?