Reference no: EM133135970

Question - Cracker Co manufactures unique specialty crackers. They are looking at purchasing a new piece of equipment that could save them $32,000 per year on direct labour costs. The equipment has an expected useful life of 7 years. The direct labour savings will go down to only $20,000 for each of the last 2 years. The initial cost of the equipment is $80,000 with an increase in working capital of $5,000, all of which will be recovered at the end of the 7 years. The terminal disposal price of the new equipment is expected to be $10,000. Cracker Co has an after-tax required rate of return of 12%. Its income tax rate is 40% each year for the next 7 years. The new equipment would qualify for a capital cost allowance rate of 20%. In order to keep the new machine running smoothly they will perform annual maintenance at a cost of $1,000 per year and an extra more detailed cleaning in year 5 which they estimate will cost $2,500. What is the NPV of the project?