Tetley Company is considering acquiring a new machine. The machine would cost $120,000 and it would cost another $30,000 to modify the machine and get it installed and ready for operations.
The machine falls into class 8 with a 20% CCA rate and it would be sold after 3 years for $50,000. The machine would require an immediate increase of $8,000 in operating net working capital. The balance of operating net working capital would remain unchanged during the project and be recovered after 3 years. The machine would have no effect on revenues, however the machine is expected to save the company $62,000 per year in before-tax operating costs.
The company’s tax rate is 30%. The project has a required rate of return of 12% per year compounded annually.
What is the NPV of the project?
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