Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and save $1,500 a year in expenses. If the old washer is retained, it will also last for 6 more years after which it will have to be junked. The washers fall into an asset class with a CCA rate of 30%. Bottoms Up owns other washing machines that also fall into this asset class. The opportunity is 15%, and the firm’s tax rate is 40%.
a. If the of the washer is expected to be zero at the end of its 6-year life, what are the cash flows of the project in years 0 to 6?
b. What is the project NPV?
c. What will the NPV and IRR be if the firm uses straight-line depreciation with a 6-year tax life?
