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Problem 2 Kudo Manufacturing Inc. is considering a new project involving the acquisition of a new machine that would replace an older machine currently in
Problem
Kudo Manufacturing Inc. is considering a new project involving the acquisition of a new machine that would
replace an older machine currently in use. The new machine costs $at and can be sold at the end of its
expected year operating life for $at The old machine was bought years ago for $ and can
be sold for $ today or for $ in years. Both, the old and the new machine belong to asset class
with a CCA rate of AII applies The vendor will charge $ for the installation of the new machine and
the removal of the old machine, and this amount must be capitalized and added to the class CCA pool.
Management believes that the company will have other class assets in four years when the equipment is sold.
The cost of operating the old machine is expected to be $ next year at with this cost increasing at
per year over the next three years at dots, Management paid $ for a study that estimates that the cost of
operating the new machine will be $ in its first year of operation at and will increase over the next three
years at the same rate as the old machine. Since the new machine is more reliable, the plant will need to keep fewer
spare parts in stock. Management expects that inventory levels can be reduced by $at when the new
machine is installed note at the end of the project, this change in net working capital will be reversed, ie
inventory levels will increase again by $ at the Kudo's marginal tax rate is and its required rate of
return RRR is
a What is the initial cash outlay the total cash flow at
b What is the first year's cash flow at ; excluding the CCA Tax Shield
c What is the last year's cash flow at ; excluding the CCA Tax Shield
d What is the year CCA? Make sure you use the Accelerated Investment Incentive rule
e What is the year CCA Make sure you use the Accelerated Investment Incentive rule
f What is the PV of CCA Tax Shields? Make sure you use the Accelerated Investment Incentive rule
g What is the NPV of the replacement project?
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