Nuff Folding Box Company, Inc. is considering purchasing a new glueing machine. The glueing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated using the Class 10 CCA rate of 30% and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by
$17,000 per year. The new machine will be depreciated using the Class 10 CCA rate of 30%. The firm has a 12 percent cost of
capital and a 40 percent tax on ordinary income and capital gains.

-The present value of the project's five-year incremental after-tax operating income is___________
A) $32,820
B) $41,421
C) $36,769
D) $44,820

Question

Nuff Folding Box Company, Inc. is considering purchasing a new glueing machine. The glueing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated using the Class 10 CCA rate of 30% and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by
$17,000 per year. The new machine will be depreciated using the Class 10 CCA rate of 30%. The firm has a 12 percent cost of
capital and a 40 percent tax on ordinary income and capital gains.

-The present value of the project's five-year incremental after-tax operating income is___________
A) $32,820
B) $41,421
C) $36,769
D) $44,820

Quizplus · Accepted Answer

To calculate the present value of incremental after-tax operating income, we need to use the formula:

PV = CF1 / (1+r) + CF2 / (1+r)^2 + ... + CFn / (1+r)^n

where PV is the present value, CF is the cash flow for each year, r is the discount rate, and n is the number of years.

Using the given numbers:
- CF1 = $8,000
- CF2 = $9,200
- CF3 = $10,080
- CF4 = $11,088
- CF5 = $12,197

We also know that the project's cost of capital is 10%.

Calculating the present value for each year and adding them up, we get:

PV = 8,000 / 1.1 + 9,200 / 1.1^2 + 10,080 / 1.1^3 + 11,088 / 1.1^4 + 12,197 / 1.1^5
PV = $36,769

Therefore, the best choice is C, $36,769.