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s a financial analyst at Minor International (MI) 4 you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the cost of capital at 15 percent for all proposed projects. As a small business, MI pays corporate taxes at the rate of 36 percent. The proposed capital project calls for developing As the capital budgeting analyst, you ate new computer software to facilitate partial automation required to answer the following in your memo to the of production in MI's plant. Alternative A has initial production department: software development costs projected at $150,000, while Alternative B would cost $250,000. Software a) Calculate the net present value of each of the development costs would be capitalized and qualify for alternatives. Which would you recommend? a capital cost allowance (CCA) rate of 30 percent. In b) The CFO suspects that there is a high risk that addition, IT would hire a software consultant under new technology will render the production equip. either alternative to assist in making the decision whether to invest in the project for a fee of $10,000 and this cost would be expensed when it is incurred. ment and this automation software obsolete atter To recover its costs, MI's IT department would only three years. Which alternative would you charge the production department for the use of comnow recommend? (Cost savings for years 1103 . puter time at the rate of $300 per hour and estimates would remain the same.) department to develop a way to eliminate this that it would take 100 hours of computer time per year step of the manufacturing process by the end of to run the new software under either alternative. MI year 3. The salvage value of the equipment owns all its computers and does not currently operate (including any CCA and tax impact) would be them at capacity. The information technology (IT) plan $30,000 at the end of year 3,520,000 at the end of calls for this excess capacity to continue in the future. year 4 , and zero after five years. Should For security reasons, it is company policy not to rent Engineering develop the solution and remove the excess computing capacity to outside users. equipment before the five yea are up? Which If the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows: s a financial analyst at Minor International (MI) 4 you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the cost of capital at 15 percent for all proposed projects. As a small business, MI pays corporate taxes at the rate of 36 percent. The proposed capital project calls for developing As the capital budgeting analyst, you ate new computer software to facilitate partial automation required to answer the following in your memo to the of production in MI's plant. Alternative A has initial production department: software development costs projected at $150,000, while Alternative B would cost $250,000. Software a) Calculate the net present value of each of the development costs would be capitalized and qualify for alternatives. Which would you recommend? a capital cost allowance (CCA) rate of 30 percent. In b) The CFO suspects that there is a high risk that addition, IT would hire a software consultant under new technology will render the production equip. either alternative to assist in making the decision whether to invest in the project for a fee of $10,000 and this cost would be expensed when it is incurred. ment and this automation software obsolete atter To recover its costs, MI's IT department would only three years. Which alternative would you charge the production department for the use of comnow recommend? (Cost savings for years 1103 . puter time at the rate of $300 per hour and estimates would remain the same.) department to develop a way to eliminate this that it would take 100 hours of computer time per year step of the manufacturing process by the end of to run the new software under either alternative. MI year 3. The salvage value of the equipment owns all its computers and does not currently operate (including any CCA and tax impact) would be them at capacity. The information technology (IT) plan $30,000 at the end of year 3,520,000 at the end of calls for this excess capacity to continue in the future. year 4 , and zero after five years. Should For security reasons, it is company policy not to rent Engineering develop the solution and remove the excess computing capacity to outside users. equipment before the five yea are up? Which If the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows