Question 2. Capital budgeting decision round your results to the nearest dollar.

Six months ago, Thalassa asked John Snow, consultant at Crown Performance International, to review the firms packaging operations at one of their production sites. John just rendered his conclusions (Thalassa paid $10,000 for Snows final report).

Snow recommends a $1,020,000 investment in a new packaging equipment, the PACK-2075-XL. The new machine would replace an equipment acquired six years ago for $900,000. The existing equipment has no economic value today, but its removal would cost $11,000.

Removing the existing equipment and installing the PACK-2075-XL would also partially disrupt production (estimated one time loss: $20,000 (after-tax)). The shipping and installation costs are respectively $12,000 and $14,000. In order to be able to operate the PACK-2075-XL, some employees would have to attend a three-day workshop at a cost of $7,000 to Thalassa

The PACK-2075-XL would be installed in a new production site built last year at a cost of $1,100,000. The building is unused but could be sold today for $1,350,000, or in 7 years for $1,700,000. Ignore capital gain taxes.

The PACK-2075-XL would allow Thalassa to save $375,000 in operating cost each year (lower maintenance costs, lower energy and raw material consumption, and lower wastes recycling costs, optimisation of existing production processes on the previous site). The firms investment in inventory would immediately decline by $90,000.

The new investment would be part of Thalassas new environmental program. The new programs aims at reducing the firm overall ecological footprint. All of the firms operations and services would be affected. This general effort would reinforce the firms strategic positioning. According to a recent market research study, it would strengthen the firms brand and induce a 4.5% increase in sales.

Use the following: Thalassas WACC is equal to 11%, the marginal tax rate is 30%, and the CCA rate is 30% (assume that the half-year rule applies).

The PACK-2075-XL would be sold in seven years for $170,000 (net of any disposal costs).

Vancouver industrial Bank offers the following loans conditions: 7 years loan at 6.5% (compounded annually): annual interest expense of $75,500.

Should Thalassa Cosmetics invest in the new equipment? Why? Show all calculations needed to support your answer.

65,511 (in S, thousands) Sales Cost of Goods sold Distribution expense Administrative expense Interest expense Earnings before taxes Taxes (30%) Net Income Thalassa Cosmetics Corp. Income statement for year ended December 31st, pro forma 2020 2019 %Sales 2018 Sales 249,175 191,673 150,279 114,629 88,673 46.3% 43.6% 56,196 41,627 21.7% 35,743 23.896 32,677 25,136 13.196 20,443 13.6% 3,467 3,474 2,535 42,205 32,763 26,047 12,662 9,829 7,814 29,544 22,934 18,233 2017 Sales 109,824 47880 43.6% 25,697 23.496 13.0% 3,076 18,861 5,658 13,203 14,310 Cash and equivalent Short-term investments Accounts receivable Inventories Other current assets Net Fixed Assets Total Assets Thalassa Cosmetics Corp. Balance Sheet as at December 31st, pro forma 2020 2019 %Sales 2018 Sales 816 628 0.39 447 0 0 37,376 34,431 18.0% 23,787 15.8% 49,835 49,994 26.1% 43,529 29.0% 16,184 12,449 6.5% 11,176 7.4% 114,254 76,254 39.8% 59,284 39.496 218,465 173,756 138,223 2017 Sales 311 0 12,165 11.1% 30,368 27.7% 9,075 8.396 40,880 37.296 92,799 (in S, thousands) Accounts payable Short term debt Accruals Other current liabilities Long-term debt Shareholders' equity Total Liabilities and SE pro forma 2020 23,590 46,677 5,824 7,921 6,666 115,329 206,007 2019 %Sales 18,146 9.5% 46,677 24.4% 4,480 2.3% 6,093 3.2% 6,666 3.5% 91,694 47.8% 173,756 2018 %Sales 12,099 8.1% 25,623 17.1% 3,656 2.4% 5,686 3.8% 4,524 3.096 86,635 57.6% 138,223 2017 %Sales 11,150 10.2% 32,182 29,3% 3,080 2.8% 3,539 3.2% 7,788 7.1% 35,060 31.9% 92,799 * SE stands for Shareholders' equity 65,511 (in S, thousands) Sales Cost of Goods sold Distribution expense Administrative expense Interest expense Earnings before taxes Taxes (30%) Net Income Thalassa Cosmetics Corp. Income statement for year ended December 31st, pro forma 2020 2019 %Sales 2018 Sales 249,175 191,673 150,279 114,629 88,673 46.3% 43.6% 56,196 41,627 21.7% 35,743 23.896 32,677 25,136 13.196 20,443 13.6% 3,467 3,474 2,535 42,205 32,763 26,047 12,662 9,829 7,814 29,544 22,934 18,233 2017 Sales 109,824 47880 43.6% 25,697 23.496 13.0% 3,076 18,861 5,658 13,203 14,310 Cash and equivalent Short-term investments Accounts receivable Inventories Other current assets Net Fixed Assets Total Assets Thalassa Cosmetics Corp. Balance Sheet as at December 31st, pro forma 2020 2019 %Sales 2018 Sales 816 628 0.39 447 0 0 37,376 34,431 18.0% 23,787 15.8% 49,835 49,994 26.1% 43,529 29.0% 16,184 12,449 6.5% 11,176 7.4% 114,254 76,254 39.8% 59,284 39.496 218,465 173,756 138,223 2017 Sales 311 0 12,165 11.1% 30,368 27.7% 9,075 8.396 40,880 37.296 92,799 (in S, thousands) Accounts payable Short term debt Accruals Other current liabilities Long-term debt Shareholders' equity Total Liabilities and SE pro forma 2020 23,590 46,677 5,824 7,921 6,666 115,329 206,007 2019 %Sales 18,146 9.5% 46,677 24.4% 4,480 2.3% 6,093 3.2% 6,666 3.5% 91,694 47.8% 173,756 2018 %Sales 12,099 8.1% 25,623 17.1% 3,656 2.4% 5,686 3.8% 4,524 3.096 86,635 57.6% 138,223 2017 %Sales 11,150 10.2% 32,182 29,3% 3,080 2.8% 3,539 3.2% 7,788 7.1% 35,060 31.9% 92,799 * SE stands for Shareholders' equity