Karisma Ltd. manufactures signs and trophies. Ms. Karol is considering investing in a new machine that will save annual material costs of $14,000 and labour costs of $6,000. The new machine costs $60,000 and has a five-year life and a terminal disposal price of zero. Karisma’s income tax rate is 30%, and the after-tax required rate of return is 7%. Karisma uses four years as a cut-off when evaluating an investment project. The capital cost allowance rate for this new machine is 20%, with a declining balance.
REQUIRED
A. What is the for this investment?
B. What is the profitability index for this investment?
C. What is the for this investment?
D. Should Karisma invest in the new machine?
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