Reference no: EM133638026
Excelsior Pulp and Paper Limited (EPP) wants to expand its operations. It is considering the purchase of mulching and pressing machine for its new line of paper worth $520,000. The company estimates that the equipment will enable them to increase revenues by $525,000 per year for the next (5) five years, which is alsothe useful life of the equipment. Variable expenses related to the pressing machine are estimated to be $250,000 per year and fixed expenses associated with the project are projected to be $25,000 per year.
The new machine is much bigger in size. EPP intends to install the new machine in an existing facility that the company is leasing out for $20,000 per year. It means EPP will start losing that leasing revenue ($20,000 per year for 5 years) once the project starts.
At the end of its useful life, management believes the mulching and pressing machine can be sold (salvage value) for $20,000. EPP will require $17,500 of net working capital for this project which will be recovered at the end of the project.
The company uses a discount rate of 10% for projects of similar risk, and their marginal tax rate is 30%. The mulching and pressing equipment has a capital cost allowance (CCA) or depreciation rate of 20% (straight-line depreciation).
Use the net present value (NPV) method to evaluate the project. Should the company accept or reject the project?