IQ Electronics, which assembles printed circuit boards, is considering the purchase of a new IC chip placement machine. It has a first cost of $300,000 and is expected to save them $125,000 per year in labour and operating costs compared with the system they have now. The life of the system is expected to be four years. The salvage value of the machine is expected to be $100,000. IQ's nominal tax rate is 40%, and the equipment CCA rate is Class 8 declining balance with only half of the CCA eligible in year 1.
What is the net present worth, given an MARR of 15%? Should IQ proceed with this purchase?
If the initial investment of $300,000 must be financed by a bank, at an effective annual interest rate of 12%/year over 4 years, is the project still worth pursuing? Explain in one sentence what has happened.