Refer to Problem 5.9. Grazemont Dairy has a corporate tax rate of 40%> and the filling machine for the dairy line has a CCA rate of 30%>. The firm has an after-tax ALARR of 10%. On the basis of the exact IRR method, determine which alternative Grazemont Dairy should choose.
Problem 5.9:
There are several mutually exclusive ways Grazemont Dairy can meet a requirement for a filling machine for their creamer line. One choice is to buy a machine. This would cost € 6 5 000 and last for six years with a salvage value of €1 0 000. Alternatively, they could contract with a packaging supplier to get a machine free. In this case, the extra costs for packaging supplies would amount to €1 5 000 per year over the six-year life (after which the supplier gets the machine back with no salvage value for Grazemont). The third alternative is to buy a used machine for €3 0 000 with zero salvage value after six years. The used machine has extra maintenance costs of €3000 in the first year, increasing by €250 0 per year. In all cases, there are installation costs of €600 0 and revenues of € 2 0 000 per vear. Using the IRR method, determine which is the best alternative. The ALARR is 10%.