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

Question

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 totalling $64,000 per year. A self-serve checkout machine would reduce part-time student wages by $44,000 per year. The machine would cost $420,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $6,800 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $11,800. The salvage value of the checkout machine in 10 years would be $49,000.

     The CCA rate is 25%. Management requires a 10% after-tax return on all equipment purchases. The company’s tax rate is 30%.

Determine the before-tax net annual cost savings that the new checkout machine will provide.

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.)

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 totalling $64,000 per year. A self-serve checkout machine would reduce part-time student wages by $44,000 per year. The machine would cost $420,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $6,800 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $11,800. The salvage value of the checkout machine in 10 years would be $49,000.

Explanation / Answer

1) Calculation of Annual net cost savings

2)a) Calculation of Net Present Value (Amount in $)

After tax rate of CCA = 25%*(1-0.30) = 17.5%

2) b) The machine should not be purchased because the net present value from the machine is negative (i.e.245,459).

Saving in part time wages $44,000 Less: Operating cost ($6,800) Net Annual Cost Savings 37,200

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