Reference no: EM133168150

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 totalling $60,000 per year. A self-serve checkout machine would reduce part-time student wages by $40,000 per year. The machine would cost $340,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $6,000 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $11,000. The salvage value of the checkout machine In 10 years would be $45,000. The CCA rate is 25%. Management requires a 10% after-tax return on all equipment purchases. The company's tax rate is 30%.

Required -

1. Determine the before-tax net annual cost savings that the new checkout machine will provide.

2-a. Using the data from (1) above and other data from the exercise, compute the checkout machine's net present value. (Hint Use Microsoft Excel to calculate the discount factor(s).)

2-b. Would you recommend that the machine be purchased?