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Question - Alpha Inc. plans to buy a new compressor at a cost of $160,000. This compressor would allow the firm to reduce its labor costs by an amount of $40,000 at the end of the next year, and then by an amount of $55,000 at the end of each of the following years. The compressor is expected to be used for ten years, after which it will be resold at its estimated market value of $80,000. The tax rate is 38% and the discount rate is 14%. The compressor is depreciated at 20% on the declining balance. There is no class closure.
Required -
1- What is the capital cost (at the beginning of the project) associated with this project?
2- What is the present value (after tax) of all 10 cash flows associated with reduced labor expenditures?
3- What is the present value of the CCA tax savings (with the half-year rule)?
4- What is the present value of the lost CCA-related tax savings from the resale of the compressor?
5- What is the net present value (NPV) of the investment project?
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