Industrial Air Filtration System (IAFS) Projections

The Ventilation Division will manufacture the IAFS using idle facilities. This plant can produce up to 250 units per year over the products 10-year life. An outside appraiser indicated that the plant is worth CAD 2,800,000, which breaks down as CAD 1,300,000 for the land and CAD 1,500,000 for the building. New production equipment costing CAD 6,200,000 is also required. It is believed that the land will have a residual value of CAD 1,500,000 at the end of the projects life, while the building and equipment will be worth CAD 500,000 and CAD 250,000, respectively. The building is subject to a CCA rate of 4.0% and the equipment is subject to a CCA rate of 20.0%. Incremental net working capital of CAD 610,000 is also needed which will be liquidated at the end of the products life.

IAFS sales are estimated to be 80 units in the first year and will grow by 25% a year until plant capacity is reached. The unit price is CAD 125,000 and unit costs are CAD 103,000 per unit, which includes direct materials, direct labour, and manufacturing overhead. The Ventilation Division must also pay a CAD 10,000 licensing fee per unit for the vacuum cleaner technology. Incremental selling and administration costs will be CAD 380,000 per year.

Discount Rate

In the past, MDFA used a corporate cost of capital to evaluate the feasibility of its new product proposals. Denison felt this rate was inaccurate as it reflected the weighted-average cost of capital of the three MDFA divisions. The Ventilation Division likely has a higher cost of capital since its products are sold primarily to private-sector companies with greater exposure to the business cycle. In comparison, the Surfaces Division likely has a lower cost of capital as it sells its products primarily to city and municipal governments with relatively stable tax revenues and public works budgets. To be more precise, Denison decided to use divisional costs of capital to evaluate each project. Prepare an Income Statement in the below format to calculate Cash flows.

	Year 0	Year 1	Year 2	etc	Last year
Sales
Costs (including CCA)
EBIT
Tax
Incremental NI
Add back CCA
Cash flow
Investment/Disposal
Total CF