Taxation - opportunity cost of capital and tax rate given, Taxation

BBQ Beach corporation manufactures inflatable air-matresses and life jackets for summer fun. the firm is considering replacement of their existing production line (CCA Class 8, d=20%) to reduce operating costs by $200,000 annually. Revenues are expected to rise by $100,000 per year, which will increase accounts receivable which are 15% of revenues. The new purchase line will cost $900,000 and will have a salvage value of $240,000 in seven years, when the company will reassess the viability of the business. The old equipment is worth $70,000 today and will be worth nothing in seven years.

If BBQ Beach has a tax rate, t=35%, and its opportunity cost of capital is 12%, then should the company replace the equipment? please draw a timeline.

Posted Date: 7/29/2012 1:55:35 PM | Location : United States

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