Fina

Examination:

FINC 0300

3

|

P a g e

Long Answer

(

5

0 marks)

Q

uestions

11 (20 marks) Suggested time 36

minutes.

Larrys Shop has asked you to make a recommendation for an

investment proposal they have been looking at

and trying to decide on. The investment is for new equipment with a total cost of $

6

,

4

00,000 including

$1

5

,000 shipping costs and $

35

,000 testing. Larry is also planning to throw a big celebration if the invest

ment

is successful for $20,000. This new equipment will require an increase in inventory of $

75

,000 from day one of

the proposal. All other assets are remaining the same. Sales will increase by $

9

,000,000 for each of the four

years of the planning horizon,

with COGS staying at

75

% of sales. All other expenses are staying the same as

before. Larrys Shop WACC is 1

3

% and their marginal tax rate is 3

2

%. The new equipment will have a CCA rate

of 2

2

% and there will be other assets in this class when the project

ends in four years. The salvage value of the

equipment will be $

3

00,000 in four years. Assume the risk profile of the proposal is the same risk profile of

Larrys Shop. Assume you are going to use the NPV method to make your recommendation.

Show all your

c

alculations and round all ending figures to the nearest dollar.

Required

Base

d on the NPV method, should Larrys Shop go ahead with the new equipment? Round all dollar amounts

to the nearest dollar. Show all your work, including any schedules and calculati