Your company is upgrading to more efficient production equipment for your firm’s only product. This upgrade was based on the recommendations of a consulting firm the company hired at a cost of $34,400. The new equipment will cost $2,000,000 and shipping costs of $10,000 will be incurred. Because the industry is changing rapidly, the equipment will be obsolete in 4 years so there will be no salvage value. The new equipment will allow you to make more of your product in the same amount of time. As a result your total sales will increase by $400,000 annually and expenses will decrease by $260,000 annually. Because your production will be increasing, inventory levels will need to be increased by $40,000 and accounts receivable will also increase by $30,000. Rather than paying your suppliers within 10 days, you will move to 30 day payments which will increase accounts payable by $20,000. The equipment will be depreciated for tax purposes at CCA rate of 20%. The company’s tax rate is 40% and the company requires a rate of return of 7% on all capital expenditure projects. A) Determine the amount of the initial investment B) Determine the amount that is subject to depreciation
Your company is upgrading to more efficient production equipment for your firm’s only product. This upgrade was based on the recommendations of a consulting firm the company hired at a cost of $34,400. The new equipment will cost $2,000,000 and shipping costs of $10,000 will be incurred. Because the industry is changing rapidly, the equipment will be obsolete in 4 years so there will be no salvage value. The new equipment will allow you to make more of your product in the same amount of time. As a result your total sales will increase by $400,000 annually and expenses will decrease by $260,000 annually. Because your production will be increasing, inventory levels will need to be increased by $40,000 and
A) Determine the amount of the initial investment
B) Determine the amount that is subject to depreciation
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