Question 2. Capital budgeting decision round your results to the nearest dollar.

Six months ago, Thalassa asked John Snow, consultant at Crown Performance International, to review the firms packaging operations at one of their production sites. John just rendered his conclusions (Thalassa paid $10,000 for Snows final report).

Snow recommends a $1,020,000 investment in a new packaging equipment, the PACK-2075-XL. The new machine would replace an equipment acquired six years ago for $900,000. The existing equipment has no economic value today, but its removal would cost $11,000.

Removing the existing equipment and installing the PACK-2075-XL would also partially disrupt production (estimated one time loss: $20,000 (after-tax)). The shipping and installation costs are respectively $12,000 and $14,000. In order to be able to operate the PACK-2075-XL, some employees would have to attend a three-day workshop at a cost of $7,000 to Thalassa

The PACK-2075-XL would be installed in a new production site built last year at a cost of $1,100,000. The building is unused but could be sold today for $1,350,000, or in 7 years for $1,700,000. Ignore capital gain taxes.

The PACK-2075-XL would allow Thalassa to save $375,000 in operating cost each year (lower maintenance costs, lower energy and raw material consumption, and lower wastes recycling costs, optimisation of existing production processes on the previous site). The firms investment in inventory would immediately decline by $90,000.

The new investment would be part of Thalassas new environmental program. The new programs aims at reducing the firm overall ecological footprint. All of the firms operations and services would be affected. This general effort would reinforce the firms strategic positioning. According to a recent market research study, it would strengthen the firms brand and induce a 4.5% increase in sales.

Use the following: Thalassas WACC is equal to 11%, the marginal tax rate is 30%, and the CCA rate is 30% (assume that the half-year rule applies).

The PACK-2075-XL would be sold in seven years for $170,000 (net of any disposal costs).

Vancouver industrial Bank offers the following loans conditions: 7 years loan at 6.5% (compounded annually): annual interest expense of $75,500.

Based on the data provided in this question (Question 2), answer the following:

2.1. List all irrelevant cash flows, and briefly explain why they are irrelevant. (8 marks)

2.2 Should Thalassa Cosmetics invest in the new equipment? Why? Show all calculations needed to support your answer. (17 marks)

Type your answers on the next page:

2.1. List all irrelevant cash flows, and briefly explain why they are irrelevant. (8 marks)

2.2 Should Thalassa Cosmetics invest in the new equipment? Why? Show all calculations needed to support your answer. (17 marks)