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 net present value of the project is__________
A) $9,761
B) $4,761
C) $4,614
D) $2,445

Question

Quizplus · Accepted Answer

The net present value of the project is calculated as the sum of the present values of cash inflows minus the present value of cash outflows. In this case, the present value of cash inflows is $35,000 (yearly revenue) multiplied by the present value factor at 10% for 3 years, which equals $90,239. The present value of the initial cost (cash outflow) is $30,000 divided by the present value factor at 10% for 0.5 year, which is $20,478. Therefore, the net present value of the project is $90,239 - $20,478 = $69,761. This means that the project is profitable and the best choice is to pursue it.