Question

The Hub Store at a university in eastern Canada is considering purchasing a self-serve checkout machine similar to those used in many grocery stores and other retail outlets. Currently, the university pays part-time wages to students totaling $59,000 per year. A self-serve checkout machine would reduce part-time student wages by $39,000 per year. The machine would cost $320,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,800 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,800. The salvage value of the checkout machine in 10 years would be $44,000.

The CCA rate is 25%. Management requires a 10% after-tax return on all equipment purchases. The company’s tax rate is 30%.

Answer 1

A / 1	B	C	D	E	F	G	H	I	J	K	L
2	1) Before tax net annual cost savings
3	Savings by purchasing the machine per annum			$39,000
4	Less: Costs
5	Operating costs		$5,800
6	Depreciation		$27,600
7	Total cost	$320,000
8	Less:salvage value	$44,000
9	Asset value to be depreciation in 10 years	$276,000
10	major maintenace cost per annum		$2,160
11	Major maintenance for 5 years	$10,800
12	for total 10 years	$21,600
13	Total cost		$35,560		=SUM(D5:D11)
14	Savings per annum before tax			$3,440	=E3-D13
15
16	2) Net present value of new machine
17	Year	Investment	Savings	maintenance	Major Maintenance	Depreciation.CCA-25%	Salvage value	Net Income	Tax@30%	Net Cashflow	PV @10%
18	0	$320,000	$0	$0	$0	$0	$0	$0	$0	-$320,000	-$320,000
19	1	$0	$39,000	$5,800	$0	$80,000	$0	-$46,800	-$14,040	$47,240	$42,945
20	2	$0	$39,000	$5,800	$0	$60,000	$0	-$26,800	-$8,040	$41,240	$34,083
21	3	$0	$39,000	$5,800	$0	$45,000	$0	-$11,800	-$3,540	$36,740	$27,603
22	4	$0	$39,000	$5,800	$0	$33,750	$0	-$550	-$165	$33,365	$22,789
23	5	$0	$39,000	$5,800	$10,800	$25,313	$0	-$2,913	-$874	$23,274	$14,451
24	6	$0	$39,000	$5,800	$0	$18,984	$0	$14,216	$4,265	$28,935	$16,333
25	7	$0	$39,000	$5,800	$0	$14,238	$0	$18,962	$5,689	$27,511	$14,118
26	8	$0	$39,000	$5,800	$0	$10,679	$0	$22,521	$6,756	$26,444	$12,336
27	9	$0	$39,000	$5,800	$0	$8,009	$0	$25,191	$7,557	$25,643	$10,875
28	10	$0	$39,000	$5,800	$10,800	$6,007	$44,000	$16,393	$4,918	$61,482	$23,704
29
30	2 a)NPV										-$100,763
31	Year	Machine	Depreciation.CCA-25%
32	0	$320,000
33	1	$320,000	$80,000
34	2	$240,000	$60,000
35	3	$180,000	$45,000
36	4	$135,000	$33,750
37	5	$101,250	$25,313
38	6	$75,938	$18,984
39	7	$56,953	$14,238
40	8	$42,715	$10,679
41	9	$32,036	$8,009
42	10	$24,027	$6,007
43
44	2 b) NPV is negative and hence the new machine should not be bought