Problem 4 (10 marks) Philip Mills is an owner of a table tennis club in Winnipeg. In the last few years, the club has been extraordinarily successful with the involvement of one of the leading world table tennis players, Huang Chang from China, who have participated in many training sessions conducted at the club. Mr. Mills senses that he can make additional money from increasing the capacity of his club by purchasing additional tables. The cost of additional 30 tables is equal to $40,000 and there is $5,000 in set-up and installation costs. With this investment, Mr. Mills estimates that he would still need to increase his inventory by $10,000 by purchasing rackets, rubbers, and balls and extend credit for fees to potential players equal to $5,000. Mr. Mills also anticipates an increase in incremental liabilities equal to $3,000, reflecting credit he receives from his suppliers. He anticipates recouping 100 percent of his additional investment in working capital at the end of year 5. From his coaching experience, Mr. Mills knows that tables will only last for five years after which they become obsolete. They also have no salvage value. With the enlarged capacity to train additional players, Mr. Mills anticipates to increase his sales by $20,000 per year in the first two years. In years 3-5, he expects that sales would reach $35,000 per year through increasing the brand awareness of his club in Winnipeg and across Canada. The increase in operating expenses is estimated to be 20 percent of the annual change in sales. Assume that the marginal tax rate is 40 percent and Mr. Mills' discount rate is 20 percent. Additionally, do not apply the half-year convention rule (amortization at 20 percent per year under the straight-line method). Would you recommend that Mr. Mills add the new table to his club? Problem 4 (10 marks) Philip Mills is an owner of a table tennis club in Winnipeg. In the last few years, the club has been extraordinarily successful with the involvement of one of the leading world table tennis players, Huang Chang from China, who have participated in many training sessions conducted at the club. Mr. Mills senses that he can make additional money from increasing the capacity of his club by purchasing additional tables. The cost of additional 30 tables is equal to $40,000 and there is $5,000 in set-up and installation costs. With this investment, Mr. Mills estimates that he would still need to increase his inventory by $10,000 by purchasing rackets, rubbers, and balls and extend credit for fees to potential players equal to $5,000. Mr. Mills also anticipates an increase in incremental liabilities equal to $3,000, reflecting credit he receives from his suppliers. He anticipates recouping 100 percent of his additional investment in working capital at the end of year 5. From his coaching experience, Mr. Mills knows that tables will only last for five years after which they become obsolete. They also have no salvage value. With the enlarged capacity to train additional players, Mr. Mills anticipates to increase his sales by $20,000 per year in the first two years. In years 3-5, he expects that sales would reach $35,000 per year through increasing the brand awareness of his club in Winnipeg and across Canada. The increase in operating expenses is estimated to be 20 percent of the annual change in sales. Assume that the marginal tax rate is 40 percent and Mr. Mills' discount rate is 20 percent. Additionally, do not apply the half-year convention rule (amortization at 20 percent per year under the straight-line method). Would you recommend that Mr. Mills add the new table to his club
