Mr. V is the director of the canoe division of Water transport Inc. The actual net income and the total assets of the division are, respectively, $500,000 and $2,500,000. Mr. V is evaluated by Water transport on the return on investment of the division. The canoe division’s equipment was purchased six years ago and has an expected useful life of 10 years, with no at the end of its life. The market value of the equipment is $210,000, but Mr. V wants to replace the equipment with new high-technology equipment that just came out on the market. This high-technology equipment can be bought for $1,170,000, and Water transport will incur a cost of $30,000 for installation. The new equipment will have a 10-year useful life, with no . The division’s overhead and direct labour costs will together decrease by $250,000 per year. The company’s income tax rate is 35% and its is 14%. The CCA rate is 25%.
REQUIRED
A. Should the company make the investment? Show your calculations and briefly explain your recommendation.
B. Briefly explain how Mr. V’s return-on-investment performance will be affected by this investment. Show your calculations?
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