Discounted Cash Flow Analysis (20 marks) You are the CFO of Bike-Inn, a manufacturer of exercise machines. Your firm is considering opening up a new store in Barrie. As part of setting up the store, you invest in furniture and fittings of $30 million. These assets have a CCA rate of 20%, calculated on the reducing balance method. The store will have a life of 20 years. At the end of the life of the store the furniture and fittings will have a zero value. Bike-Inn is expecting to sell 5,000 exercise machines per year, and the price of each machine is $2,500. You expect the unite sales and the selling price to remain constant over the 20 year life of the store. Expenses will amount to $6,000,000 per year, and will also remain constant at $6,000,000 each year for the 20 year life of the store. Your firm will also need to invest $2 million in additional working capital immediately, and the working capital will remain at this $2 million level for the life of the project. At the end of year 20, the working capital balance is settled, and will be zero. Your firm's marginal tax rate is 30 percent. Your cost of capital for evaluating this project is 12%. Required: (Round to the nearest dollar) (a) [9 marks] Calculate the Present Value of the Operating Cash Flows (b) [3 marks] Calculate the Present Value of the CCA Tax Shield (c) [8 marks] Calculate the NPV of this project, and conclude on whether you should go ahead with the project. Discounted Cash Flow Analysis (20 marks) You are the CFO of Bike-Inn, a manufacturer of exercise machines. Your firm is considering opening up a new store in Barrie. As part of setting up the store, you invest in furniture and fittings of $30 million. These assets have a CCA rate of 20%, calculated on the reducing balance method. The store will have a life of 20 years. At the end of the life of the store the furniture and fittings will have a zero value. Bike-Inn is expecting to sell 5,000 exercise machines per year, and the price of each machine is $2,500. You expect the unite sales and the selling price to remain constant over the 20 year life of the store. Expenses will amount to $6,000,000 per year, and will also remain constant at $6,000,000 each year for the 20 year life of the store. Your firm will also need to invest $2 million in additional working capital immediately, and the working capital will remain at this $2 million level for the life of the project. At the end of year 20, the working capital balance is settled, and will be zero. Your firm's marginal tax rate is 30 percent. Your cost of capital for evaluating this project is 12%. Required: (Round to the nearest dollar) (a) [9 marks] Calculate the Present Value of the Operating Cash Flows (b) [3 marks] Calculate the Present Value of the CCA Tax Shield (c) [8 marks] Calculate the NPV of this project, and conclude on whether you should go ahead with the project