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Should they buy this cost-cutting equipment

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Question - Cost Cutting a company can spend $1,7500,000 today on the purchase and installation of new automated equipment that has a potential opportunity to cut costs. The equipment will have a nine-year life, at which time it can be sold for $134,000. The equipment qualifies as a Class 8 asset with a 20% CCA rate. Since the equipment will be purchased in 2020, it is subject to the Accelerated Investment Incentive rules, rather than the half-year rule. The benefit of installing the new equipment is a reduction in material costs of $280,000 per year. The new process will lead to an immediate increase in Net Working Capital (NWC) of $47,000, which will be recovered at the conclusion of the project. The firm has a 25% corporate tax rate and it wants a 17% return. Should they buy this cost-cutting equipment?

What is the correct value for Step #1?

What is the correct value for Step #2?

What is the correct value for Step #3?

What is the correct value for Step #4?

What is the correct value for Step #5?

What is the correct value for Step #6?

Based on your answers to the six questions, what is the appropriate course of action to follow?

Reference no: EM133028994

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