21 22 23 Thousands) 24 Part 1. Input Data 25 Key Output: NPV $9,122 26 Building cost (Capital cost) $12,000 27 Equipment cost (Capital cost) $8,000 Salvage value of building $10,000 28 Net operating WC/Sales 10% Salvage value of equipment $2,000 29 First year sales (in units) 20,000 Tax rate 30% 30 Growth rate in units sold 31 Sales price per unit 32 Variable cost per unit 33 Fixed costs 0.0% WACC 12.0% $3.00 Inflation: growth in sales price 2.0% $2.10 $8,000 Inflation: growth in VC per unit Inflation: growth in fixed costs 2.0% 1.0% 34 Building CCA rate (Class 1) 4% 35 Equipment CCA rate (Class 43) 30% 36 37 Part 2. CCA Schedules 38 Building Equipment 39 Years UCC before CCA CCA UCC after CCA Years UCC before CCA 40 2017 $12,000 $240 $11,760 2017 $8,000 41 2018 $11,760 $470 $11,290 2018 $6,800 CCA $1,200 $2,040 $4,760 UCC after CCA $6,800 42 2019 $11,290 $452 $10,838 2019 $4,760 43 2020 $10,838 $434 $10,404 2020 $3,332 $1,428 $3,332 $1,000 $2,332 44 45 + B E F G H 46 47 Part 3. Projected Net Cash Flows Years 48 0 1 2 49 2016 2017 2018 3 2019 4 2020 50 Investment Outlays: Long-Term Assets 51 Building 52 Equipment ($12,000) (8,000) 53 54 Operating Cash Flows over the Project's Life 55 Units sold 56 Sales price 57 Sales revenue 58 Variable costs 60 CCA (building) 61 CCA (equipment) 59 Fixed operating costs 62 Oper. Income before taxes (EBIT) 63 Taxes on operating income (30%) 64 Net operating profit after taxes (NOPAT) 65 Add back CCA 66 Operating cash flow 20,000 $3.00 20,000 20,000 20,000 $3.06 $3.12 $3.18 $60,000 $61,200 $62,424 $63,672 42,000 42,840 43,697 44,571 8,000 8,080 8,161 8,242 240 470 452 434 1,200 2,040 1,428 1,000 8,560 7,770 8,687 9,426 2,568 2,331 2,606 2,828 5,992 5,439 6,081 6,598 1,440 2,510 1,880 1,433 $7,432 $7,949 $7,960 $8,031 67 68 Cash Flows Due to Net Operating Working Capital 69 Net operating working capital (based on sales) $6,000 $6,120 $6,242 $6,367 $0 70 Cash flow due to investment in NOWC ($6,000) ($120) ($122) ($125) $6,367 71 72 Salvage Cash Flows: Long-Term Assets 73 Salvage value cash flow: Building 74 Salvage value cash flow: Equipment 75 Total salvage value cash flows 76 $10,000 2,000 $12,000 77 Net cash flow (Time line of cash flows) 78 ($26,000) $7,312 $7,827 $7,836 $26,399 79 A B D E F 80 Part 4. Key Output and Appraisal of the Proposed Project (WACC = 12%) 81 82 Net Present Value 83 IRR 84 MIRR 85 PI 86 87 88 89 Cumulative cash flow for payback Part of year required for payback: 90 91 92 93 $9,122 24.45% 20.75% 1.35 Payback = 3.11 H + 1 Years 2 (18,688) (10,861) 3 (3,026) 4 23,373 1.00 1.00 1.00 0.11 Years 94 95 Discounted cash flow for payback: 96 Cumulative discounted cash flow 0 1 2 3 4 6,529 6,239 5,577 16,777 (19,471) (13,232) (7,655) 9,122 97 98 Part of year required for payback: Discounted Payback =| 1.00 1.00 1.00 0.46 3.46 99 100 The Edmonton Fabricating Company (EFC) manufactures snow blowers. EFC is investigating the feasibility of a new line of cordless snow blower. The new manufacturing equipment to produce the new line of snow blower will cost $700,000. The installation costs are expected to be $50,000, the setup costs are expected to be $30,000 and the training costs are expected to be $20,000. The company has just finished a marketing feasibility and this study strongly endorses going ahead with a further financial study to evaluate the overall feasibility of the project. The cost of the marketing study was $50,000. The projected useful life of the new equipment is 8 years and the project unit sales are expected to be: | YEAR | UNIT SALES 1 3,000 2 3.300 3 3.500 4 3.700 5 4,000 6 4.250 7 8 4,300 4,300 The new cordless snow blower would be priced to sell at $300 per unit and the variable operating costs are expected to be 55% of sales. After the first year, the sales price is estimated to increase by 2% every year. The total fixed operating costs are expected to be $150,000 per year and would remain constant over the life of the project. The project would require $40,000 in working capital at the start (time period zero). The entire amount of working capital will be recovered at the end of the project. The estimated salvage value of the equipment after 8 years is $150,000. The marginal tax rate is 40%. The CCA rate of the equipment is 20%. The company uses the DCF model to determine the cost of retained earnings and new common stock. You have been provided with the following data: Do = $0.80; Po= $22.50; g = 8.00% (constant) and F=9.00%. The company's 9.25% coupon rate, semi-annual payment, $1,000 par value bond that matures in 20 years sells at a price of $1,075. The new bonds would be privately placed with no flotation costs. The target capital structure is 40% debt, 40% common equity (retained earnings) and 20% common equity (new common stock).