Reference no: EM132620417

SPI-K is considering the purchase of a new labeling machine that will keep detailed records of every item processed. The labeler is likely to have little effect on operating revenues and expenses. Its acquisition is primarily for increasing management information about processing. The labeler costs $144,600 and would be included in Class 8 for tax purposes. SPI-K internal accountant has stated that due to the fast write-off of Class 8 assets (20% CCA rate), its real cost is less than $144,600. Due to technological obsolescence, it would have zero salvage value.

Required:

Question a. Since the labeler cannot produce a profit or even show short run savings, should it even be evaluated as a capital budgeting expenditure? Explain.

Question b. Explain whether the real cost is less than $144,600.

Question c. If the company has a 40 percent tax rate and a 18% discount rate, calculate the real cost of the labeler. Assume there would be other assets in the class.