Kalaway Inc. is considering the purchase of a new machine for $$625,000.$ The firm's old machine has a book value of $$480,000$ but can be sold today for $$215,000.$ The new machine will be subject to a CCA rate of $25$ percent. It is expected to save an annual cash flow of $$95,000$ per year for $10$ years through reduced fuel and maintenance expenses. The company will need to invest $$38,000$ in spare parts inventory $($working capital$)$ when they purchase the machine. At the end of the $10$ years the company believes it can sell the machine for $$120,000.$ Kalaway Inc. has a $14$ percent cost of capital and a $35$ percent tax rate.

"Required:

Gather the relevant information into the key facts of this case and compute the Net Present Value for this capital budgeting decision $"$

Gather the key facts and answer the questions above

Solution

Practice for Test $2$ Formula

Key Facts

Initial Investment wrong

Trade$-$ins wrong

CCA rate $($d$)$ wrong

Annual Savings wrong

Initial Working Capital wrong

Salvage Value of Equipment wrong

Cost of Capital $($r$)$ wrong

Number of Years wrong

Tax rate $($t$)$ wrong

Question a: NPV Calculations

Year Items Expected Cash Flow After tax Cash flow Present Value of Cash flow

$0$ Initial Invesment wrong wrong wrong

$0$ Trade$-$ins $($Salvage of Old Machine$)$ wrong wrong wrong

$0$ Initial Working capital wrong wrong wrong

$1-10$ Annual Cost savings wrong wrong wrong

$10$ Salvage Value of New Equipment wrong wrong wrong

$10$ Working capital Recovery wrong wrong wrong

Calculating CCA Tax Shield

$($C$-$S$)$ wrong

dt wrong

$($r$+$d$)$ wrong

dt$/($r$+$d$)$ wrong

$(1+0\mathrm{.}5$r$)/(1+$r$)$ wrong

$0$ PV of CCA Tax shield wrong

NPV wrong

NPV Decision