ABC corporation would like to invest $ 13.5 million (including $ 500,000 of shipping costs) to increase its car fleet by 500 cars. The company plans to keep the cars for three years, and will then resell the fleet at 40% of original cost. The company expects an increase in revenues of $ 16 500 per additional car, for each year of operation. The controller foresees an increase in expenses equivalent to $ 0.12 per kilometer, with 40 000 kilometers per year per car. Treat revenues and expenses from operations as one cash flow (i.e. earnings from operations). This project will require an increase of $ 700,000 in the company's working capital. (Do not include this amount when calculating CCA, UCC and CCA tax savings, however, any related outflow or inflow should be considered when doing the payback period in E). The tax rate for the company is 30% and the rate of depreciation for cars is 40% declining with half year. The return required by shareholders is 11%. A. Calculate the NPV of the project, the efficient way, using the formula to calculate tax savings from amortization. Is this project profitable, and therefore should this company undertake this project? B. Calculate the Profitability Index for the project using the cash flows in the problem A. How do you interpret the PI result? Note: Treat revenues and expenses from operations as net INFLOWS (net cash earnings from operations) for the purposes of this exercise. C. WHAT IF: Some old cars would be sold for a total of $500,000 at time 0? Identify the two cash flows in A affected by this transaction. Calculate the CHANGE in each of the two flows? What is the total net change? What is the new NPV? Disregard the sale of old cars in the following questions. D. What is the BOOK VALUE of the $ 13.5 million initial investment at the time of resale? Calculate the book value using the UCC formula for this purpose and then confirm your response by doing a chart to calculate CCA and UCC each year. What is the capital gain or a capital loss? E. Calculate the Payback Period. See chart below for guidance. Ask yourself: Do I discount cash flows with this method? (See Course 8) Year Investment Operations CCA tax savings Total annual cash flows Cumulative payback 0 (13 500 000) (700 000) (14 200 000) 1 2 3 PAYBACK PERIOD