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A Table showing the amortization schedule of the loan over the 10-year period. (5 marks)
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A Table showing the Capital Cost Allowance and Undepreciated Capital Cost Allowance for the furnace and another Table for the computerized control unit over the 10 year period (4 marks)
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A spreadsheet showing the following details under the following assumptions:
a) A projected Incremental Income Statement over a 10-year period. b) A projected Cash Flow statement from the projections in part (a) c) The Net Present Value of the after-tax cash flows. d) Using the net present value you calculated above, explain in laymans (practical) terms what the net present value means in terms of value to the company. e) In this case, would the IRR be higher or lower than the MARR. Explain. (You dont have to calculate the IRR). f) Calculate the Payback period of this incremental project. g) If the firm has a policy of not accepting a project with a payback period of greater than 5 years, would this decision be consistent with the net present value calculation that you calculated above. Explain. (2 marks)
Alberta Fabrication Corporation. (AFC) The firm's marginal (Corporate) tax rate is 27 percent and the firm's discount rate (MARR) is 15 percent. The firm will need $300,000 for initial inventory (working capital) but does not expect to realize any of this money at the end of the project. The furnace qualifies for a $50,000 ITC and will be realized in the first year's cash flow. (Year 1) Alberta Fabrication Corporation is in the business of providing high temperature, pre- fabricated burners for the oil and gas and other heavy industries. Their main customers are oil refineries, petrochemical facilities and auto manufacturers. The President of the firm wants to expand its operation by manufacturing a new line of industrial burners that reduce both the amount of fuel consumed and the amount of carbon dioxide emissions. With climate change being an important environment policy issue, customers are demanding this type of technology. For this project, the firm will borrow $500,000 at 5 percent compounded annually for 10 years and the bank has agreed to accept payments at the end of each year. The President is very excited about this potential new project and would like you to construct an incremental income statement and cash flow analysis outlining the benefits and costs of installing this new technology. As a result, the President of the company would like you to do an income statement and cash flow analysis on this incremental project. For the manufacturing process, the firm needs to buy a new furnace and a computerized control unit that will monitor and regulate the internal furnace temperature. The installed cost of the furnace is $4.2 million. The computerized control unit will cost an additional $122,318. The President expects sales to be $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, fuel for furnace will cost $200,000 per year nnual maintenance and electricity consumption will be $20,000 and $10,000 respectively. These costs are expected to increase by 5 percent (5%) per year after the first year) to the end of the useful life of the asset, which is expected to be 10 years. At the end of 10 years, the furnace will have a salvage value of $100,000. (The salvage value is net of any dismantling costs) The furnace comes under class 43, which has a CCA rate of 30 percent. The computerized control unit 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) Alberta Fabrication Corporation. (AFC) The firm's marginal (Corporate) tax rate is 27 percent and the firm's discount rate (MARR) is 15 percent. The firm will need $300,000 for initial inventory (working capital) but does not expect to realize any of this money at the end of the project. The furnace qualifies for a $50,000 ITC and will be realized in the first year's cash flow. (Year 1) Alberta Fabrication Corporation is in the business of providing high temperature, pre- fabricated burners for the oil and gas and other heavy industries. Their main customers are oil refineries, petrochemical facilities and auto manufacturers. The President of the firm wants to expand its operation by manufacturing a new line of industrial burners that reduce both the amount of fuel consumed and the amount of carbon dioxide emissions. With climate change being an important environment policy issue, customers are demanding this type of technology. For this project, the firm will borrow $500,000 at 5 percent compounded annually for 10 years and the bank has agreed to accept payments at the end of each year. The President is very excited about this potential new project and would like you to construct an incremental income statement and cash flow analysis outlining the benefits and costs of installing this new technology. As a result, the President of the company would like you to do an income statement and cash flow analysis on this incremental project. For the manufacturing process, the firm needs to buy a new furnace and a computerized control unit that will monitor and regulate the internal furnace temperature. The installed cost of the furnace is $4.2 million. The computerized control unit will cost an additional $122,318. The President expects sales to be $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, fuel for furnace will cost $200,000 per year nnual maintenance and electricity consumption will be $20,000 and $10,000 respectively. These costs are expected to increase by 5 percent (5%) per year after the first year) to the end of the useful life of the asset, which is expected to be 10 years. At the end of 10 years, the furnace will have a salvage value of $100,000. (The salvage value is net of any dismantling costs) The furnace comes under class 43, which has a CCA rate of 30 percent. The computerized control unit 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)
