1. Company A recently put out a request for quote for the supply of new machines. Company A needs to purchase Forty (40) new machines each year for the next seven years. In order to bid on the project, you will need to acquire $500,000 of new, specialized equipment. This equipment is a class 8 asset with a 20% CCA rate, calculated using the Half-year rule method. You believe that you will be able to sell the new equipment for $70,000 at the end of the project. It will cost you $3,000 in labour and supplies to produce each ticketing machine and your fixed overhead will cost $135,000 per year. Net working capital will rise by $28,000 initially but this will all be recovered at the end of the project. Your firm’s tax rate is 35% and the firm’s cost of capital is 15%. How much should we bid to produce each new machine?

The correct value to use for Step #1 - the PV of the initial cost, is:

Multiple Choice

• $-800,000

• $-635,000

• $-570,000

• $-500,000

q2. Company A recently put out a request for quote for the supply of new machines. Company A needs to purchase Forty (40) new machines each year for the next seven years. In order to bid on the project, you will need to acquire $500,000 of new, specialized equipment. This equipment is a class 8 asset with a 20% CCA rate, calculated using the Half-year rule method. You believe that you will be able to sell the new equipment for $70,000 at the end of the project. It will cost you $3,000 in labour and supplies to produce each ticketing machine and your fixed overhead will cost $135,000 per year. Net working capital will rise by $28,000 initially but this will all be recovered at the end of the project. Your firm’s tax rate is 35% and the firm’s cost of capital is 15%. How much should we bid to produce each new machine?

The correct value to use for Step #2 - the PV of the incremental, after-tax costs & revenues, is:

Multiple Choice

• $-865,396

• $-689,590

• $-986,678

• $-745,741