Question
Smart Inc. is a company that produces dog shampoos in Quebec. The president of Smart Inc, M. Leblanc thinks that it is necessary to move
Smart Inc. is a company that produces dog shampoos in Quebec. The president of Smart Inc, M. Leblanc thinks that it is necessary to move the activities from Quebec to Ontario. Therefore, he requests that you to evaluate the profitability of this project for him.
The construction of the new factory in Ontario will cost 5 000 000$ (including purchase and installation of new equipment). The factory will be built on a land that costs 1500 000$ today. M. Leblanc thinks that the actual factory in Quebec can be sold for 1 000 000$ today (for simplification, consider this amount as an exchange value).
Since M. Leblanc's intention is to retire in 15 years, he believes that he will sell all his assets including his new factory at that time. The new factory will be sold for 1 800 000$ in 15 years and the land will be sold for 2000 000$.
At the present, Smart Inc. is selling 600 000 units at 5 $ per unit every year. The variable cost is at 3 $ per unit. The annual fixed cost is at 100 000$. The marketing experts estimate that the new factory in Ontario would double the production, the price per unit will be 4.50$ and variable and fixed costs will remain the same.
The Tax law allows a cost of capital allowance (CCA) of 20% for all depreciable assets in this project. The factory's CCA is with decreasing (declining) method. The company's tax rate is 30% and investors require 10% return on this type of project.
Given this information, answer to following questions:
- Identify and calculate the total amount of initial investment in the BEGINNING of the project. (6 points).
- Identify and calculate the present value of the cash flows DURING the project. (10 points).
- Identify and calculate the present value of the cash flows at the END of the project. (10 points)
- Calculate the NPV of the project. (4 points)
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