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 $59,000 per year. A self-serve checkout machine would reduce part-time student wages by $39,000 per year. The machine would cost $320,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,800 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,800. The salvage value of the checkout machine in 10 years would be $44,000.

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

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 $59,000 per year. A self-serve checkout machine would reduce part-time student wages by $39,000 per year. The machine would cost $320,000 and has a 10-year useful life. Total costs of operating the checkout machine would be $5,800 per year, including maintenance. Major maintenance would be needed on the machine in five years at a total cost of $10,800. The salvage value of the checkout machine in 10 years would be $44,000.

P Duiremin the before-tax net annual cost savings that the new checkout machine wil rovide. 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? Yes 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 $39,000 4 Less: Costs 5 Operating costs $5,800 6 Depreciation $27,600 7 Total cost $320,000 8 Less:salvage value $44,000 9 Asset value to be depreciation in 10 years $276,000 10 major maintenace cost per annum $2,160 11 Major maintenance for 5 years $10,800 12 for total 10 years $21,600 13 Total cost $35,560 =SUM(D5:D11) 14 Savings per annum before tax $3,440 =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 @10% 18 0 $320,000 $0 $0 $0 $0 $0 $0 $0 -$320,000 -$320,000 19 1 $0 $39,000 $5,800 $0 $80,000 $0 -$46,800 -$14,040 $47,240 $42,945 20 2 $0 $39,000 $5,800 $0 $60,000 $0 -$26,800 -$8,040 $41,240 $34,083 21 3 $0 $39,000 $5,800 $0 $45,000 $0 -$11,800 -$3,540 $36,740 $27,603 22 4 $0 $39,000 $5,800 $0 $33,750 $0 -$550 -$165 $33,365 $22,789 23 5 $0 $39,000 $5,800 $10,800 $25,313 $0 -$2,913 -$874 $23,274 $14,451 24 6 $0 $39,000 $5,800 $0 $18,984 $0 $14,216 $4,265 $28,935 $16,333 25 7 $0 $39,000 $5,800 $0 $14,238 $0 $18,962 $5,689 $27,511 $14,118 26 8 $0 $39,000 $5,800 $0 $10,679 $0 $22,521 $6,756 $26,444 $12,336 27 9 $0 $39,000 $5,800 $0 $8,009 $0 $25,191 $7,557 $25,643 $10,875 28 10 $0 $39,000 $5,800 $10,800 $6,007 $44,000 $16,393 $4,918 $61,482 $23,704 29 30 2 a)NPV -$100,763 31 Year Machine Depreciation.CCA-25% 32 0 $320,000 33 1 $320,000 $80,000 34 2 $240,000 $60,000 35 3 $180,000 $45,000 36 4 $135,000 $33,750 37 5 $101,250 $25,313 38 6 $75,938 $18,984 39 7 $56,953 $14,238 40 8 $42,715 $10,679 41 9 $32,036 $8,009 42 10 $24,027 $6,007 43 44 2 b) NPV is negative and hence the new machine should not be bought

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