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Unformatted text preview: ActSc 371 Chapter 8 part three of practice questions 1. A manufacturing firm that produces aerospace components, BBM, currently uses a CNC machine that it purchased several years ago. The unit, which originally costs $500,000, currently has a UCC of $250,000. BBM is considering adding a newer CNC machine. The new CNC machine will cost $700,000 and will require an additional $50,000 for delivery and installation. The new machine will belong to the class 10 assets with a CCA rate of 15%. BBMs tax rate is 40% and this projects cost of capital is 10%. BBM also anticipates that it will have to maintain its working capital requirements above its regular levels as follows: Year 0: $50,000; Year 1: $60,000; Year 2: $70,000; Year 3: $60,000; Year 4: $50,000. It is further anticipated that at the end of the fifth year, working capital requirements will return to pre-project levels. If BBM purchases the new CNC machine, the first year revenue is expected to increase by $100,000 (due to increased production capacity), and the first year operating expense is expected to decrease by $20,000. The difference of the annual revenues and operating expenses, which is R-E, is expected to grow at 3% per year till the end of 5th year. After expenses, which is R-E, is expected to grow at 3% per year till the end of 5th year....
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- Fall '11