Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question Six: (24 marks) Singh Industries is in the business of manufacturing industrial burners for the oil and gas industry. The company is planning on

image text in transcribed

Question Six: (24 marks) Singh Industries is in the business of manufacturing industrial burners for the oil and gas industry. The company is planning on manufacturing a new line of high-tech burners in Calgary (Series #ENG209), since it has an existing manufacturing plant here. For the expansion, the company needs to invest $1 million ($1,000,000) in new equipment to manufacture these new models. This new facility will generate revenues of $1,500,000 per year over the next 5 years. At the end of 5 years, the equipment will be sold. The equipment will be depreciated at 30% CCA. (Using the 50% rule) The Company will need $50,000 in working capital for initial inventory but will recover this money in 5 years when the inventory is sold. To operate the facility, maintenance and operating costs are expected to run $400,000 per year and labour will cost $820,000 per year. (With no expected inflation) The expected salvage value of the equipment at the end of 5 years is 150,000. The company has a marginal tax rate of 20% and the company uses a discount rate (MARR) of 10 percent. (10%) To help finance the expansion, the firm is planning to borrow $100,000 at 5 percent compounded annually over 5 years. The company will make annual year-end payments to service the loan. The company has done extensive research on developing these new burners. As a result, the new equipment qualifies for a 10 percent Investment Tax Credit (ITC). The tax credit will be reported in the first year of operation. a) Construct a CCA and a UCC Table for the 5-year period. (1 marks) b) Calculate the annual payments for the loan of $100,000 at 5% compounded annually for 5 years. (1 mark) c) In the spaces below, construct an amortization table for the loan of $100,000 at 5% for 5 years. (4 marks) Determine the incremental taxable income, income taxes and net income of the ENG209 over the next 5 years with a marginal tax rate of 20 percent. (construct an Incremental Income Statement for 5 years) (6 marks) (Note: Do not calculate the cash flow at this stage e) Calculate the disposal tax effect on the equipment when it is sold in year 5. (2 marks) f) Calculate the after tax cash flow and the Net Present Worth (NPV) of the ENG209 if the company uses a MARR = 10%? (8 marks)|| g) Using your finding above, describe the meaning of NPV.(Assume your boss knows nothing about engineering economics or finance) (2 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

IT Audit Fundamentals Study Guide

Authors: Isaca

1st Edition

1604209402, 978-1604209402

More Books

Students also viewed these Accounting questions