Question: Smithson Mechanical Ltd. is considering replacing an existing hoist with a newer, more efficient piece of equipment. The existing hoist has a remaining useful life

Smithson Mechanical Ltd. is considering replacing an existing hoist with a newer, more efficient piece of equipment. The existing hoist has a remaining useful life of 5 years. The new hoist costs CAD 46,000 to purchase and install and alsohas an estimated life of 5 years. It is a Class 5 asset with a CCA rate of 10.0%

The company currently produces 8,500 units per year. The new hoist is expected to reduce variable costs by CAD 1.30 per unit and fixed costs by CAD 3,500 year. An increased investment in new working capital of CAD 4,500 will also be required to support the new machine.

The existing hoist can currently be sold for CAD 15,000. At the end of 5 years, the existing hoist will have a salvage value of CAD 2,000. The new hoist can be sold for CAD 11,000 at the end of the 5-year period. The project’s RRR is 7.0% and its tax rate is 25.0%.

The present value of the net initial cash flows of this project today is closest to:

a) CAD -31,090.

b) CAD -35,500.

c) CAD -43,957.

Net Investment (46,000 – 15,000)	(31,000)
Tax shield²	4,409.70
Increase in NWC	(4,500)
Total

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