Premium Essay

Retil Ltd

In: Business and Management

Submitted By dmb0dmb
Words 389
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Retil Ltd.

Retil Ltd. is considering purchasing a machine for $350,000. Retil Ltd. estimates it can save
$58,000 per year for the next seven years due to increased efficiency resulting from using this machine. In addition, the machine is capable of producing a new product. Retil Ltd. estimates the operating income from this new product will be $11,000 per year for the next seven years. At the end of seven years, Retil Ltd. estimates the machine can be sold for $50,000. However, the machine will require major maintenance at the end of four years, which is estimated to cost
$12,600. The machine has a useful life of 12 years and Retil Ltd. intends on depreciating the machine using the straight-line method. The machine is eligible for a CCA tax deduction at 30%.
Retil Ltd.’s minimum desired after tax rate of return is 14%. Since Retil Ltd. is not a CCPC,
Retil Ltd. is subject to a 40% tax rate.
1. Should Retil Ltd. purchase the machine?

Present value of cash flows

A B A x B

Description Year

Pre-tax Amount

Post-Tax Amount

Pos- Tax Discount Rate

Present Value Factor

Present Value

Outflow or Inflow

[pic] Non-recurring Cash Flows:
Tax Shield:

Cdt x (1 + 0.5k) - Sn x dt d + k (1 + k) (1 + k)n d + k

= (350,000 x .3 x .4) x (1 + (.5 x .14)) - 50,000 x (.3 x .4) (.3 + .14) (1 + .14) (1 + .14)7 (.3 + .14)

= 42,000 x 1.07 - 50,000 x .12 .44 1.14 2.5022686…...

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