A firm needs to purchase and install an auxiliary boiler and a flue gas desulphurization unit. The cost of the auxiliary boiler is $1 million and $3,200,000 for the FGDU. The unit needs a control system that will cost an additional $150,000. (Installed). The firm expects fuel savings of $1,600,000 for the first year and to increase two percent per year (2%) for each year thereafter.

For the first year of operation, the chemical reagent will cost of $200,000 per year. Annual maintenance and disposal of gas will be an additional $10,000 and $22,000 respectively. These costs are expected to increase by 2% per year (after the first year) to the end of the useful life of the asset, which is 10 years. At the end of 10 years, the unit will have a salvage value of $50,000. (The salvage value is net of any dismantling costs)

The boiler and FGDU come under class 43, which has a CCA rate of 30 percent. The computerized control system comes under Class 50, which has a CCA rate of 55 percent. The President wants you to use the half-year rule on the CCA for tax purposes. (50 percent rule)

The firm's marginal tax rate is 28 percent and the firm's discount rate (MARR) is 10 percent. The firm will need $500,000 for initial inventory (working capital) but does not expect to recoup any of this money at the end of the project. The Auxiliary boiler together with the FGDU qualifies for a $25,000 ITC and will be realized in the first year's cash flow. (Year 1)

For this project, the firm will borrow $450,000 at 3 percent compounded annually for 10 years and the bank has agreed to accept payments at the end of each year.

Find the following

a) The Net Present Value of the after-tax cash flows.

b) Using the net present value you calculated above, explain in layman's (practical) terms what the net present value means in terms of value to the company.

c) In this case, would the IRR be higher or lower than the MARR. Explain. (You don't have to calculate the IRR).

d) Calculate the Payback period of this incremental project.

e) The President is expecting inflation to be 2 percent per year for the next 10 years. Calculate constant cash flows for each of the 10 years.

f) In order to be consistent with the NPV calculated in part "a" above, briefly explain what MARR should be used for constant cash flows.