Homework answers / question archive / Acct 352 Question #1) A proposed cost-saving device has an installed cost of $60,500 and will reduce costs by an average of $21,000 per year

Acct 352 Question #1) A proposed cost-saving device has an installed cost of $60,500 and will reduce costs by an average of $21,000 per year

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Acct 352 Question #1) A proposed cost-saving device has an installed cost of $60,500 and will reduce costs by an average of $21,000 per year.  It will actually function for 6 years at which time it will have a salvage value of $19,000.  The device will be in a special CCA class with a CCA rate of 20% and it will be the only asset in the class. The tax rate is 40% and cost of capital is 13%.

What is the NPV of the project and should it be accepted?

Question #2

Casual Wear (CW) is a small clothing distributor located in Calgary.  The owner, Fred, is studying the possibility of opening a new outlet in Winnipeg.  Fred would like to estimate an expected rate of return for this project.  The risk free rate is 7% and the market return is expected to be 12%.  Fred has calculated that the beta of the Calgary store is 1.91 .  

Fred’s banker has suggested a loan to supplement Fred’s equity in buying the new outlet.  The banker has reminded Fred that he can deduct interest payments for tax purposes.  Fred’s marginal tax rate is 42%.  He used 70% debt in the Calgary store, but now he would like to use 40% debt in the Winnipeg store.

Required:

Calculate Fred’s required return for the Winnipeg Store.