Devon Inc. has developed a powerful efficient snow blower that is significantly less polluting than existing snow blowers currently on the market. The company spent $2,500,000 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 $3,500 per unit, and the company believes that variable costs would amount to $990 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 4% after year 1. The companys 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 projects 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. Toefield Inc.s 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-risk projects at 10%. Assume that the half-year rule applies to the CCA.

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E F G J Tax rate WACC Inflation CCA rate year 1 year 2 year 3 year 4 B D 19 20 21 Part 1. Input Data (in thousands of dollars except for unit amount) 22 23 Equipment cost 24 Net Operating WC/sales 25 Yearly sales (in units) 26 Sales price per unit 27 Variable cost per unit 28 Non-variable costs 29 30 31 Part 2. CCA Schedule 32 33 Beg. UCC 34 CCA 35 End UCC 36 37 38 39 40 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 41 42 Years 43 Investment Outlays at Time Zero: 44 Equipment 45 46 Operating Cash Flows over the Project's Life: 47 Units sold 48 Sales price 49 Variable costs 50 51 Sales revenue 52 Variable costs 53 Non-variable operating costs 54 Depreciation (equipment) 55 Oper. income before taxes (EBIT) 56 Taxes on operating income 57 Net Operating Profit After Taxes (NOPAT) 58 Add back depreciation 0 1 2 3 4