A proposed cost-saving device has an installed cost of $540,000. 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 percent.
a. What must the pre-tax cost savings be for us to favour the investment? We require a 11 percent 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.)
Cost savings $
b. Suppose the device will be worth $78,000 in salvage (before taxes). How does this change your answer? (Do not round your intermediate calculations. Round the final answer to 2 decimal places.)
Cost savings $