$2.$ Calculate the cash flows for each year, from $0($initial investment$)$ to $10$ or $15($depending on the project$).$

a$.$ Do an income statement and add back depreciation to calculate the CF:

b$.$ Don't forget the inventory needs at the beginning as part of the initial cash flows.

c$.$ Remember tax effects at the end of the project as a result of the disposals.

d$.$ Note: you don't subtract interest from any cash flows because interest costs are considered in the WACC. So "incremental net income" $=$ EBIT$(1-$T$)$The second product is an automated paving stone installer. Increasingly cities are substituting

paving stones for concrete when installing pedestrian walkways. Not only are paving stones

visually more appealing than concrete or pebbled aggregate, but they also don't crack in the

winter months, can be easily repaired if damaged, and can be moved and then replaced in order

to access water and sewage services.

Industrial Air Filtration System $($IAFS$)$ Projections

The Ventilation Division will manufacture the IAFS using idle facilities. This plant can produce up

to $170$ units per year over the product's $10-$year life. An outside appraiser indicated that the

plant is worth $$2,550,000,$ which breaks down as $$800,000$ for the land and $$1,750,000$ for the

building, which at the moment has a UCC of $1,750,000.$ New production equipment costing

$$6,000,000$ is also required. It is believed that the land will have a residual value of $$1,700,000$ at

the end of the project's life, while the building and equipment will be worth $$500,000$ and

$$250,000,$ respectively. The building is subject to a CCA rate of $4\mathrm{.}0\%$ and the equipment is

subject to a CCA rate of $20\mathrm{.}0\%.$ Incremental net working capital of $$600,000$ is also needed,

which will be liquidated at the end of the product's life.

IAFS sales are estimated to be $60$ units in the first year and will grow by $15\%$ a year until plant

capacity is reached. The unit price is $$92,000$ and unit costs are $$65,000$ per unit, which includes

direct materials, direct labour, and manufacturing overhead. The Ventilation Division must also

pay a $$10,000$ licensing fee per unit for the vacuum cleaner technology. Selling and

administration costs will be higher by $$350,000$ for the duration of the project in order to

support the IAFS product.

Automated Paving Stone Installer $($APSI$)$ Projections

A new factory is needed to manufacture the APSI. The facility can produce up to $170$ machines

each year over the product's $15-$year life. A parcel of land worth $$750,000$ will be purchased, and

a building constructed for $$1,900,000.$ Equipment costing $$4,800,000$ will also be required. At

the end of the project's life, it is estimated the land can be sold for $$760,000,$ while the building

will have a residual value of $$600,000$ and the equipment's residual value will be negligible.

Building and equipment costs are subject to CCA rates of $4\mathrm{.}0\%$ and $20\mathrm{.}0\%$ respectfully. An

investment of $$390,000$ in net working capital is needed to support production that will be

liquidated at the end of the product's life.

APSI sales are forecasted to be $70$ units in the first year, $110$ in the second year, $140$ in the third

year, $160$ in the fourth year, and then reach factory capacity of $170$ units in the fifth year. The

product's list price is $$230,000$ and its unit cost is $$210,000,$ which includes direct materials,

direct labour and factory overhead. Incremental selling and administration costs to support the

business will be $$1,760,000.$ Existing corporate overhead of $$120,000$ per year will be allocated

to the product as per company policy. Factory equipment will be overhauled$/$renewed at a cost

of $$1,200,000$ during year $8.$ The overhaul would be treated as a capital investment, both in

terms of financial accounting and tax accounting.

Discount Rate