There is unused space in the factory. This space can either be rented to another business for $20,000 per year or used to manufacture a new product. The new product would require an investment of $856,000 in equipment and $145,000 in working capital, the latter can be liquidated at the end of the product lifecycle, eight years in the future. The salvage value for the equipment at the end of 8-years is estimated at $58,000. The equipment will be placed in the 20% CCA asset pool. According to market research, 35,000 units of the product can be sold each year. The unit selling price is $55.00, its unit variable cost is $35.00, and fixed costs total $450,000 per year. These figures will remain unchanged throughout the product's life cycle. The corporate income tax rate is 35% and its cost of capital is 14%. The decision is being made before the 2019 tax year. Calculate the project's NPV using the six-step approach. Would you recommend approval for the project? 1) Initial investment (nearest dollar without comma, e.g. 15000, or if negative, -15000): 2) PV of operating income (nearest dollar without comma, e.g. 15000, or if negative, -15000): 3) PV of CCA tax shield (nearest dollar without comma, e.g. 15000, or if negative, -15000): 4) PV of salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000): 5) PV of CCA lost from salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000): 6) PV of working capital (nearest dollar without comma, e.g. 15000, or if negative, -15000): 7) Net Present Value (nearest dollar without comma, e.g. 15000, or if negative, -15000): 8) Approve or reject project (choose one) v Reject Approve
There is unused space in the factory. This space can either be rented to another business for $20,000 per year or used to manufacture a new product. The new product would require an investment of $856,000 in equipment and $145,000 in working capital, the latter can be liquidated at the end of the product lifecycle, eight years in the future. The salvage value for the equipment at the end of 8-years is estimated at $58,000. The equipment will be placed in the 20% CCA asset pool. According to market research, 35,000 units of the product can be sold each year. The unit selling price is $55.00, its unit variable cost is $35.00, and fixed costs total $450,000 per year. These figures will remain unchanged throughout the product's life cycle. The corporate income tax rate is 35% and its cost of capital is 14%. The decision is being made before the 2019 tax year. Calculate the project's NPV using the six-step approach. Would you recommend approval for the project? 1) Initial investment (nearest dollar without comma, e.g. 15000, or if negative, -15000): 2) PV of operating income (nearest dollar without comma, e.g. 15000, or if negative, -15000): 3) PV of CCA tax shield (nearest dollar without comma, e.g. 15000, or if negative, -15000): 4) PV of salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000): 5) PV of CCA lost from salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000): 6) PV of working capital (nearest dollar without comma, e.g. 15000, or if negative, -15000): 7) Net Present Value (nearest dollar without comma, e.g. 15000, or if negative, -15000): 8) Approve or reject project (choose one) v Reject Approve
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 13P
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:There is unused space in the factory. This space can either be rented to another business for $20,000 per year or used to
manufacture a new product. The new product would require an investment of $856,000 in equipment and $145,000 in
working capital, the latter can be liquidated at the end of the product lifecycle, eight years in the future. The salvage value for
the equipment at the end of 8-years is estimated at $58,000. The equipment will be placed in the 20% CCA asset pool.
According to market research, 35,000 units of the product can be sold each year. The unit selling price is $55.00, its unit
variable cost is $35.00, and fixed costs total $450,000 per year. These figures will remain unchanged throughout the
product's life cycle. The corporate income tax rate is 35% and its cost of capital is 14%. The decision is being made before
the 2019 tax year.
Calculate the project's NPV using the six-step approach. Would you recommend approval for the project?
1)
Initial investment (nearest dollar without comma, e.g. 15000, or if negative, -15000):
2)
PV of operating income (nearest dollar without comma, e.g. 15000, or if negative, -15000):
3)
PV of CCA tax shield (nearest dollar without comma, e.g. 15000, or if negative, -15000):
4)
PV of salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000):
5)
PV of CCA lost from salvage (nearest dollar without comma, e.g. 15000, or if negative, -15000):
6)
PV of working capital (nearest dollar without comma, e.g. 15000, or if negative, -15000):
7)
Net Present Value (nearest dollar without comma, e.g. 15000, or if negative, -15000):
8)
Approve or reject project (choose one) v
Reject
Approve
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