Introduction You are hired to evaluate a water project as an investment project. The activity includes the production and sales of water to a small town. A local source of water is available and the production costs are fixed. The price of water is regulated and therefore stays constant over time. The investor will only need to purchase the equipment, operate the plant, and then pass the license back to the local municipality.

Task 1 Follow the steps below to construct the cash flow statement. General assumptions All transactions are in Canadian Dollars Investment takes place in 2019 Operation also starts in 2019 and carries on for 6 years (2019 to 2024) In 2025, no production or sales will take place, but equipment are salvaged and accounts are closed Investment cost Licensing cost (one-time fee, no salvage value): $1.5 Million CAD Equipment and machinery cost: $28 Million CAD Operating cost Only during the operation (2019 to 2024) Labor cost: $1 Million CAD per year Material cost: $750,000 CAD per year Working capital Accounts payable: 20% of material cost

Cash balance: 15% of operating cost Accounts receivable: 10% of sales Sales Volume of water sold: 4.5 Million cubic meters in 2019, 5.5 Million cubic meters after that Price of water: $1.7 CAD per cubic meter Salvage value of assets Economic life of equipment and machinery: 10 years Sales of equipment and machinery will take place in 2025 Income tax Tax life of assets: 15 years Deductible expenses for the calculation of income tax: depreciation and operating cost Corporate income tax rate: 23%

Task 2 Estimate the net cash flow for this activity and report the following criteria: Net present value at 15% discount rate IRR Benefit cost ratio at 15% discount rate Payback period at 15% discount rate

Task 3 Recalculate the investment criteria using a 20% discount rate and discuss what the results are different.

Hints Using excel can make it easier for you, some useful functions: 1. NPV: npv(discount rate, cash flow) 2. IRR: irr(cash flow)