Question

Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $12 million, it will last for 8years. Both systems entail $1 million in operating costs; both will be depreciated in an asset class that has a CCA rate of 30%; neither will have any salvage value at the end of its life. The firm's tax rate is 35%, and the discount rate is 12%. Which system should blooper install?

The answer should in excel with details, please

Answer 1

We need to analyze the offers using a cash flow NPV analysis

The key metric here will be final cost incurred per year

Whichever firm will offer a lower cost/ year will be the better offer

We will use the NPV method to analyze the costs

Quick & dirty
	1	2	3	4	5
-10,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000
Total NPV	-13,604,776
Cost / Year	-2,720,955

Do it Right
	1	2	3	4	5	6	7	8
-12,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000	-1,000,000
Total NPV	-16,967,640
Cost / Year	(2,120,955)

Going by the Cost/ year metrics, Do it right as a lower cost and hence we shall go with Do it right