a) Develop a Net Income Statement
b)Develop a Net Cash flow statement
c) Use the PW criterion to decide if the company should undertake this project.
A manufacturing project has the following information: Expected life: 3 years; MARR: 35% Manufacturing plant: o Equipment (CCA rate 30%), salvage value $1.75 million: . Purchasing cost of $9 million, including transportation, plus $0.75 million for installation of equipment o Building (cost $5.0 million, CCA rate 10%), salvage value $3.0 million o Land (cost $4.0 million), salvage value $5.0 million O Annual production: 1,000 units in year 1, increasing by 10% per year thereafter. Sales: The sales price of each unit is $40,000 Manufacturing costs: o The estimated annual variable manufacturing costs would total 70% of the annual dollar sales. The estimated annual fixed costs are $6 million for the first year of operation, and it is expected to increase at a rate of 10% per year over the life of the project. Working capital: $1 million required in year 2 of the project Tax Rate: 40%; Capital Gains, tcg, 20% Capital Structure: Debt Ratio: 70% Debt financing: 0 Term loan 65%; annual interest rate 12%; for 4 years. Loan to be paid based on equal repayment of principal method, PLUS yearly interest on the unpaid yearly balance. o Bonds. See next page for details. Bonds mature at the end of year 5. The bonds will be repurchased at the end of the project to maintain the Debt Ratio. Equity financing: O Retained earnings: $4.00 million o Common share (stock). See next page for details. The shares will be repurchased at the end of the project to maintain the Debt Ratio. Bonds Floatation Cost Rate Annual Interest Rate Bond Face Value at Maturity Bond Issued Price 2.75% 10% 1,000 985 $ $ $ Common Shares Share issued Price Floatation Cost Rate Annual Dividend per Share Share Market Price at year N 33 4.50% 1.25 35 $ $ A manufacturing project has the following information: Expected life: 3 years; MARR: 35% Manufacturing plant: o Equipment (CCA rate 30%), salvage value $1.75 million: . Purchasing cost of $9 million, including transportation, plus $0.75 million for installation of equipment o Building (cost $5.0 million, CCA rate 10%), salvage value $3.0 million o Land (cost $4.0 million), salvage value $5.0 million O Annual production: 1,000 units in year 1, increasing by 10% per year thereafter. Sales: The sales price of each unit is $40,000 Manufacturing costs: o The estimated annual variable manufacturing costs would total 70% of the annual dollar sales. The estimated annual fixed costs are $6 million for the first year of operation, and it is expected to increase at a rate of 10% per year over the life of the project. Working capital: $1 million required in year 2 of the project Tax Rate: 40%; Capital Gains, tcg, 20% Capital Structure: Debt Ratio: 70% Debt financing: 0 Term loan 65%; annual interest rate 12%; for 4 years. Loan to be paid based on equal repayment of principal method, PLUS yearly interest on the unpaid yearly balance. o Bonds. See next page for details. Bonds mature at the end of year 5. The bonds will be repurchased at the end of the project to maintain the Debt Ratio. Equity financing: O Retained earnings: $4.00 million o Common share (stock). See next page for details. The shares will be repurchased at the end of the project to maintain the Debt Ratio. Bonds Floatation Cost Rate Annual Interest Rate Bond Face Value at Maturity Bond Issued Price 2.75% 10% 1,000 985 $ $ $ Common Shares Share issued Price Floatation Cost Rate Annual Dividend per Share Share Market Price at year N 33 4.50% 1.25 35 $ $
