A proposed cost-saving device has an installed cost of $700,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax rate is 35%. a. What must the pre-tax cost savings be for us to favour the investment? We require an 10% return. (Hint: This one is a variation on the problem of setting a bid price.) (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Cost savings $1370120.47 b. Suppose the device will be worth $98,000 in salvage (before taxes). How does this change your answer? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
A proposed cost-saving device has an installed cost of $700,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax rate is 35%. a. What must the pre-tax cost savings be for us to favour the investment? We require an 10% return. (Hint: This one is a variation on the problem of setting a bid price.) (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Cost savings $1370120.47 b. Suppose the device will be worth $98,000 in salvage (before taxes). How does this change your answer? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:A proposed cost-saving device has an installed cost of $700,000. It is in Class 8
(CCA rate = 20%) for CCA purposes. It will actually function for five years, at which
time it will have no value. There are no working capital consequences from the
investment, and the tax rate is 35%.
a. What must the pre-tax cost savings be for us to favour the investment? We
require an 10% return. (Hint: This one is a variation on the problem of setting a bid
price.) (Do not round your intermediate calculations. Round the final answer to
2 decimal places. Omit $ sign in your response.)
Cost savings
$1370120.47 x
b. Suppose the device will be worth $98,000 in salvage (before taxes). How does
this change your answer? (Do not round your intermediate calculations. Round
the final answer to 2 decimal places. Omit $ sign in your response.)
Cost savings
$40740 x
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