Nuff Folding Box Company, Inc

question 101

Multiple Choice

Nuff Folding Box Company, Inc. is considering purchasing a new glueing machine. The glueing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated using the Class 10 CCA rate of 30% and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by
$17,000 per year. The new machine will be depreciated using the Class 10 CCA rate of 30%. The firm has a 12 percent cost of
capital and a 40 percent tax on ordinary income and capital gains.

-The internal rate of return for the project is

• A) between 9 and 10 percent.
• B) less than 12 percent.
• C) between 10 and 11 percent.
• D) greater than 12 percent.

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Definitions:

Cost Of Capital

The minimum rate of return a company must earn on its investments to maintain its market value and satisfy its investors.

Individual Project

A specific, defined task or study designed to achieve particular goals within a given timeframe, typically involving a detailed plan and execution by one or more individuals.

Weighted Average

An analysis that incorporates the diverse levels of relevance of the numbers within a dataset.

Discount Rate

The discount rate applied in discounted cash flow analysis to calculate the current value of expected future cash flows.