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Tetley Company is considering acquiring a new machine. The machine would cost $120,000 and it would cost another $30,000 to modify the machine and get it installed and ready for operations.
The machine falls into class 8 with a 20% CCA rate and it would be sold after 3 years for $50,000. The machine would require an immediate increase of $8,000 in operating net working capital. The balance of operating net working capital would remain unchanged during the project and be recovered after 3 years. The machine would have no effect on revenues, however the machine is expected to save the company $62,000 per year in before-tax operating costs.
The company’s tax rate is 30%. The project has a required rate of return of 12% per year compounded annually.
What is the NPV of the project?
(Note: To get full marks you must show your work. If you are using the table approach you must show the numbers for year 0 to year 3. In addition you must show the calculation or function you used to arrive at the final answer. If you are using the formula, recipe or list approach you must show each step in the approach.)
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