MANAGEMENT ACCOUNTING 3 (318)

Question title (Investment) Q1). Sundry Coal Company [SCC] is considering upgrading a large Coal mine. The mine was purchased five years ago for $ 20,000,000. A market research study just finished for $ 500,000 has estimated the following data. (Assume that the Company will have assets in class 8 for Perpetuity).

CURRENT OPERATIONS.

Cash Revenues $ 8,000,000. Cash Expenses $ 4,000,000.

Undepreciated Capital Cost: Class 8 - Equipment [CCA rate is 20%] $ 10,000,000.

Tax rate 30%. Cost of Capital 8%.

PROPOSED UPGRADE - NEW ESTIMATES Life of project 6yrs New Equipment $ 3,000,000. Market research project just completed. $ 500,000.

Revised Cash Revenues $ 11,000,000. Revised Cash Expenses $ 3,500,000.

Salvage - New Equipment in six years $ 800,000. Salvage - Old equipment in Six years $ 300,000. Salvage - Old equipment- at time o (today) $ 600,000.

REQUIRED: a) Calculate the initial investment ? b) Calculate the present value incremental After-Tax cash flow? c) Calculate the present value of the salvage value? d) Calculate the tax shield and tax shield lost? e) Compute the NPV on the project and whether to accept or reject the project?