A B C D E F G H 10 11 12 13 14 Snow Inc. has developed a powerful efficient snow blower that is significantly less polluting than existing snow blowers currently on the market. The company spent $1,500,000 developing this product and the marketing department spent another $350,000 to assess the market demand. It would cost $25 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would require net working capital at the beginning of each year equal to 20% of sales (NOWC0 = 20% (Sales1), NOWC1 = 20% (Sales2), etc.). The efficient snow blowers would sell for $3,600 per unit, and the company believes that variable costs would amount to $1100 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 4% after year 1. The company's non-variable costs would be $800,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project is expected to be of average risk. The firm believes it could sell 3,500 units per year. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. The company has other assets in this asset class. Its federal-plus- provincial tax rate is 30%. Its cost of capital is 7% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high- 15 risk projects at 10%. Assume that the half-year rule applies to the CCA. 16 17 18 19 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 20 21 22 23 Part 1. Input Data (in thousands of dollars except for unit amount) 24 25 Equipment cost 26 Net Operating WC/sales 27 Yearly sales (in units) 28 Sales price per unit 29 Variable cost per unit 30 Non-variable costs $ 25,000,000 20% 3,500 $3,600.00 Tax rate WACC Inflation CCA rate $1,100.00 $800,000.00 30% 7% 4.0% 30.0% 31 32 33 Part 2. CCA Schedule 34 35 Beg. UCC 36 CCA 37 End UCC 38 20 year 1 25,000,000 year 2 year 3 year 4 J