A proposed cost-saving device has an installed cost of $540,000. It is class 8 (CCA rate 20%) for CCA purposes. It will actually function for 5 years; at which time it will have no value. There are no working capital consequences from the investment, and the tax rate is 35%.
1) What must the pre-tax cost savings be for us to favour this investment? We require an 11 percent return.
2) Suppose the device will be worth $78,000 in salvage (before taxes). How does it change your answer?