Selah Company Bought a New Computer-Assisted Design (CAD) Software for $10,000,000

question 68

Essay

Selah Company bought a new computer-assisted design (CAD) software for $10,000,000 at the beginning of Year 1. The software has a useful life of 3 years and will save the company annual cash operating expenses of $4,000,000 in each of those 3 years. The software will have a zero net salvage value at the end of 3 years. It belongs to Class 12 with a capital cost allowance (CCA) rate of 100%. With special permission from the Canada Revenue Agency, the half-year CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1. The company's income tax rate and after-tax cost of capital are 40% and 12%, respectively.

Required:

a) Calculate the maximum total CCA tax shied available to the company.
b) Calculate the present value of the annual cash savings in operating expenses.
c) Calculate the net present value (NPV) of the investment.
d) Was the internal rate of return (IROR) greater than or less than the company's after-tax cost of capital of 12%? (Note: Do NOT try to calculate the implied actual internal rate or return.)
e) By how much must the annual savings in operating expenses be increased or decreased to make the investment just worthwhile, that is, either zero NPV or 12% IROR?

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Definitions:

Personality Traits

Personality traits are characteristic patterns of thoughts, feelings, and behaviors that make a person unique and are consistent over time.

Central Traits

Essential characteristics of an individual's personality that influence most behaviors, forming the foundation of how others perceive them.

Mature Adults

Individuals who have reached an advanced stage of psychological development, characterized by a high level of emotional stability and responsibility.

Cardinal Traits

Core personality traits that are dominant and define a person's overall behavior and attitude.