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RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $2,300,000...

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Finance

RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $2,300,000 and is in a 30% CCA class. Investment in NWCapital is 200,000 at the start. One time up front training costs are $10,000 before tax. The machine is expected to have a salvage value of $300,000 at the end of a projected 10 year life. Revenues are expected to be $600,000 per year, and cost are estimated at $220,000 per year.

An alternative older machine is being considered. The cost is 1,500,000 and is also a 30% CCA class item. Investment in NWC is higher at 50,000. Training costs are the same at 10,000 before tax. the The machine is expected to have no salvage value at the end of a similar projected 10 year life. It is slower so revenue is expected to be $300,000 per year, and operating costs are estimated at $150,000 per year.

The Cost of Capital for the firm is 12% and the firm is in the 34% tax bracket. The NWC investment will be recovered at the end of the project.

The firm can only afford one machine. Should an investment be undertaken?

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