Problem
Alpha Inc. plans to purchase a new compressor at a cost of $160,000. This compressor requires the firm to reduce its labor costs by $40,000 at the end of the next year, and then by $55,000 at the end of each subsequent year. The compressor is expected to be used for ten years, after which sur will resell it for its estimated market value of $80,000. The tax rate is 38% and the discount rate is 14%. The compressor is depreciated at 20% on the declining balance. There is no class closure.
a) What is the capital cost (at the beginning of the project) associated with this project?
b) What is the present value (after tax) of all 10 cash flows associated with reducing labor expenditures?
c) What is the present value of the CCA tax savings (with the half-year rule)?