Answer Happy

Holliday Manufacturing Limited (HMT) is considering replacing an
existing equipment. The
new equipment will cost $1.2 million and requires an
installation cost of $150,000. The existing
equipment is 2 years old, cost $800,000 new, and has a book
value of $350,000. The current
market value for the old equipment is $200,000 and could be used
for five more years and would
be then worth $50,000. The new equipment would reduce the
operating costs by $350,000. The
CCA rate is 30 percent. The new equipment could be sold for
$250,000 at the end of 5 years. An
increased investment in net working capital of $25,000 will be
needed to support operations if
the new equipment is acquired. Cost of capital for MHT is 10%
and has a tax rate of 40%.
Required:
a) Determine the NPV for this proposal.
b) Explain the highest cost of capital HMT
could have and still accept the proposal?
c) What is your recommendation and
why?