The Hub Store at a university in eastern Canada is considering purchasing a self

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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

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 totaling $57,500 per year. A self-serve checkout machine would reduce part-time student wages by $37,500 per year. The machine would cost $290,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,500 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,500. The salvage value of the checkout machine in 10 years would be $42,500. The CCA rate is 25%. Management requires a 9% 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. Net annual cost savings 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).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative value should be indicated with minus sign.) Net present value 2-b. Would you recommend that the machine be purchased? O Yes O No

Explanation / Answer

A / 1 B C D E F G H I J K L 2 1) Before tax net annual cost savings 3 Savings by purchasing the machine per annum $37,500 4 Less: Costs 5 Operating costs $5,500 6 Depreciation $24,750 7 Total cost $290,000 8 Less:salvage value $42,500 9 Asset value to be depreciation in 10 years $247,500 10 major maintenace cost per annum $2,100 11 Major maintenance for 5 years $10,500 12 for total 10 years $21,000 13 Total cost $32,350 =SUM(D5:D11) 14 Savings per annum before tax $5,150 =E3-D13 15 16 2) Net present value of new machine 17 Year Investment Savings maintenance Major Maintenance Depreciation.CCA-25% Salvage value Net Income Tax@30% Net Cashflow PV @9% 18 0 $290,000 $0 $0 $0 $0 $0 $0 $0 -$290,000 -$290,000 19 1 $0 $37,500 $5,500 $0 $72,500 $0 -$40,500 -$12,150 $44,150 $40,505 20 2 $0 $37,500 $5,500 $0 $54,375 $0 -$22,375 -$6,713 $38,713 $32,584 21 3 $0 $37,500 $5,500 $0 $40,781 $0 -$8,781 -$2,634 $34,634 $26,744 22 4 $0 $37,500 $5,500 $0 $30,586 $0 $1,414 $424 $31,576 $22,369 23 5 $0 $37,500 $5,500 $10,500 $22,939 $0 -$1,439 -$432 $21,932 $14,254 24 6 $0 $37,500 $5,500 $0 $17,205 $0 $14,795 $4,439 $27,561 $16,434 25 7 $0 $37,500 $5,500 $0 $12,903 $0 $19,097 $5,729 $26,271 $14,371 26 8 $0 $37,500 $5,500 $0 $9,678 $0 $22,322 $6,697 $25,303 $12,699 27 9 $0 $37,500 $5,500 $0 $7,258 $0 $24,742 $7,423 $24,577 $11,316 28 10 $0 $37,500 $5,500 $10,500 $5,444 $42,500 $16,056 $4,817 $59,183 $25,000 29 30 2 a)NPV -$73,725 31 Year Machine Depreciation.CCA-25% 32 0 $290,000 33 1 $290,000 $72,500 34 2 $217,500 $54,375 35 3 $163,125 $40,781 36 4 $122,344 $30,586 37 5 $91,758 $22,939 38 6 $68,818 $17,205 39 7 $51,614 $12,903 40 8 $38,710 $9,678 41 9 $29,033 $7,258 42 10 $21,775 $5,444 43 44 2 b) NPV is negative and hence the new machine should not be bought

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