Holliday Manufacturing Limited (HMT) is considering replacing an existing equipment. The

new equipment will cost $1.2 million and requires an installation cost of $150,000. The existing

equipment is 2 years old, cost $800,000 new, and has a book value of $350,000. The current

market value for the old equipment is $200,000 and could be used for five more years and would

be then worth $50,000. The new equipment would reduce the operating costs by $350,000. The

CCA rate is 30 percent. The new equipment could be sold for $250,000 at the end of 5 years. An

increased investment in net working capital of $25,000 will be needed to support operations if

the new equipment is acquired. Cost of capital for MHT is 10% and has a tax rate of 40%.

*Show your work*

Required:

a) Determine the NPV for this proposal.

b) Explain the highest cost of capital HMT could have and still accept the proposal?

c) What is your recommendation and why?