Alberta Pasta is contemplating the production of a new type of pasta. The equipment needed for production has a constant capital cost allowance over a 3-year lifespan and no salvage value. No additional working capital is required.
When considering the production of a new product, Alberta Pasta needs to evaluate the cost of acquiring the necessary equipment. In this case, the equipment has a constant capital cost allowance, which means that its cost is spread evenly over the 3-year lifespan of the equipment. The constant capital cost allowance implies that the equipment's value decreases gradually over time until it reaches zero salvage value at the end of the 3 years. Since the equipment's capital cost allowance is constant, there is no need to account for salvage value or additional working capital. Working capital typically refers to the funds required to support day-to-day operations, including inventory, accounts receivable, and accounts payable. However, in this scenario, the consideration is solely focused on the cost of the equipment and its depreciation over time. Alberta Pasta should evaluate the capital cost allowance and assess whether the benefits of producing the new pasta type outweigh the cost of acquiring and depreciating the equipment. Additionally, they should consider other factors such as market demand, production costs, and potential profitability to make an informed decision about proceeding with the new pasta production.