The Hub Store at a university in eastern Canada is considering purchasing a self-serve check- out machine
Question:
The Hub Store at a university in eastern Canada is considering purchasing a self-serve check- out machine similar to those used in many grocery stores and other retail outlets. Currently the university pays part-time wages to students totalling $55,000 per year. A self-serve check-out machine would reduce part-time student wages by $35,000 per year. The machine would cost $240,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,000 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,000. The salvage value of the checkout machine in 10 years would be $40,000. The CCA rate is 30%. Management requires a 10% after-tax return on all equipment pur- chases. The company’s tax rate is 30%.
Required:
1. Determine the before-tax net annual cost savings that the new checkout machine will provide.
2. Using the data from (1) above and other data from the exercise, compute the checkout machine’s net present value. Would you recommend that the machine be purchased?
Net Present ValueWhat is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb