Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision:

The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the company's after-tax cost of capital is 12%
-What is the approximate effective cost now of the working capital component of the investment decision?
A) $0.
B) $986.
C) $2,000.
D) $3,014.

Question

Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision:

The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the company's after-tax cost of capital is 12%
-What is the approximate effective cost now of the working capital component of the investment decision?
A) $0. 
B) $986. 
C) $2,000. 
D) $3,014.

Quizplus · Accepted Answer

To calculate the effective cost of the working capital component, we need to multiply the initial investment by the after-tax cost of capital (12%) and add to it the present value of the after-tax salvage value of the old computer (i.e. $2,500/(1.12)^4 = $1,386.07). Therefore, the effective cost of the working capital component is approximately $986 ($10,000 x 12% + $1,386.07 - $2,500). Option B is the only choice closest to the calculated answer.

Eureka Company Is Considering Replacing an Old Computer with a New