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CCA Tax Shields Data for this question can be found in the "q3data" worksheet of the "Assignment i2 Data" Excel spreadsheet posted on eClass. Your answer to this question should be submitted via spreadsheet format. All worksheets for this assignment should be combined within one file and submitted via eClass (see instructions on cover page of this assignment for more details) It is December 2018. Josephine Cochrane owns and operates a small-appliance repair shop. The shop rents space in a building and is quite busy. Ms. Cochrane is considering constructing a new, larger shop that would replace the existing facility. If construction began in the next few weeks, the shop would be operational before year end. Ms Cochrane's plan is to operate the shop for ten years and then to retire at the end of 2028 S. Ms. Cochrane estimates that the new shop would require roughly 1,500 square metres of space. Suitable land is currently available at a cost of S185,000. The building would cost about $753.34 per square metre to construct or $1,130,010 in total. Equipment would cost a further $375,000. Ms. Cochrane has assembled the following estimates for the new shop Total gross revenue per labour hour: S91.25 Total gross revenue per labour hour: 851.17 Annual cash expenses Supervision and clerical $110,000 e Repairs and maintenance $43,000 Tax rate Cost of capital 40% 16% Foregone carnings 50,000 Initial outlay for land (S) Initial outlay for building ($) Initial outlay for equipment (S) 185,000 1,130,010 375,000 CCA rate for the building CCA rate for the equipment: CCA rate for the land 5% 20% 0% Capacity operations (hours) Gross revenue per hour (S) Variable costs per hour (S) Additional annual costs (S) 25,500 91.25 51.17 267,000 Initial NWC requirement NWC (%sales) 20,000 10% Resale value of the land (S) Resale value of the building (S) 185,000 600,000 Year: 2018 2019 2020 2021 2022 20234 2025 2026 20272028 2029 4 INCREMENTAL EARNINGS FORECAST Capacity 60% 70% 80% 90% 100% 100% 100% 100% 100% 100% Utilities, business and property taxes, insurance S75,000 Advertising $39,000 Total $267,000 Capacity operations for the shop are estimated at 25,500 saleable hours per year. Ms Cochrane estim ates that the new shop will operate at 60% capacity in 2019, 70% capacity in 2020, 80% capacity in 2021, 90% capacity in 2022, and 100% thereafter Ms. Cochrane believes that investment in different types of working capital will total $20,000 at inception of the project. She also believes that the net working capital required by the project will stay at 10% of total gross revenue at the end of each year 2019 through 2027 and then fall to S0 by the project's end At the end of 2028, when she plans to retire, Ms. Cochrane expects to be able to sell the land for $185,000 and the building for $600,000, 50% of any capital gain from the sale of the land would be taxable at the corporate rate of 40%. The equipment would be worthless Capital cost allowance depreciation rates are 5% for the building, 20% for the equipment, and 0% for land. The corporate tax rate is 40%. When considering investment decisions of this type, Ms. Cochrane uses a 16% real after-tax hurdle rate (a) (10 points) Build a forecast of free cash flows for constructing the new, larger shop. Assume all initial investments are incurred immediately (i.e. at the end of 2018) Make sure to calculate annual CCA using a declining-balance depreciation schedule, accounting for the half-year rule (50% rule) for first year of any capital investment. (b) (3 points) What is the NPV of the constructing the new, larger shop? Assume asset pools terminate for CCA tax purposes when assets are sold. Any terminal loss tax shield or recapture CCA is incurred one year the assets are sold CCA Tax Shields Data for this question can be found in the "q3data" worksheet of the "Assignment i2 Data" Excel spreadsheet posted on eClass. Your answer to this question should be submitted via spreadsheet format. All worksheets for this assignment should be combined within one file and submitted via eClass (see instructions on cover page of this assignment for more details) It is December 2018. Josephine Cochrane owns and operates a small-appliance repair shop. The shop rents space in a building and is quite busy. Ms. Cochrane is considering constructing a new, larger shop that would replace the existing facility. If construction began in the next few weeks, the shop would be operational before year end. Ms Cochrane's plan is to operate the shop for ten years and then to retire at the end of 2028 S. Ms. Cochrane estimates that the new shop would require roughly 1,500 square metres of space. Suitable land is currently available at a cost of S185,000. The building would cost about $753.34 per square metre to construct or $1,130,010 in total. Equipment would cost a further $375,000. Ms. Cochrane has assembled the following estimates for the new shop Total gross revenue per labour hour: S91.25 Total gross revenue per labour hour: 851.17 Annual cash expenses Supervision and clerical $110,000 e Repairs and maintenance $43,000 Tax rate Cost of capital 40% 16% Foregone carnings 50,000 Initial outlay for land (S) Initial outlay for building ($) Initial outlay for equipment (S) 185,000 1,130,010 375,000 CCA rate for the building CCA rate for the equipment: CCA rate for the land 5% 20% 0% Capacity operations (hours) Gross revenue per hour (S) Variable costs per hour (S) Additional annual costs (S) 25,500 91.25 51.17 267,000 Initial NWC requirement NWC (%sales) 20,000 10% Resale value of the land (S) Resale value of the building (S) 185,000 600,000 Year: 2018 2019 2020 2021 2022 20234 2025 2026 20272028 2029 4 INCREMENTAL EARNINGS FORECAST Capacity 60% 70% 80% 90% 100% 100% 100% 100% 100% 100% Utilities, business and property taxes, insurance S75,000 Advertising $39,000 Total $267,000 Capacity operations for the shop are estimated at 25,500 saleable hours per year. Ms Cochrane estim ates that the new shop will operate at 60% capacity in 2019, 70% capacity in 2020, 80% capacity in 2021, 90% capacity in 2022, and 100% thereafter Ms. Cochrane believes that investment in different types of working capital will total $20,000 at inception of the project. She also believes that the net working capital required by the project will stay at 10% of total gross revenue at the end of each year 2019 through 2027 and then fall to S0 by the project's end At the end of 2028, when she plans to retire, Ms. Cochrane expects to be able to sell the land for $185,000 and the building for $600,000, 50% of any capital gain from the sale of the land would be taxable at the corporate rate of 40%. The equipment would be worthless Capital cost allowance depreciation rates are 5% for the building, 20% for the equipment, and 0% for land. The corporate tax rate is 40%. When considering investment decisions of this type, Ms. Cochrane uses a 16% real after-tax hurdle rate (a) (10 points) Build a forecast of free cash flows for constructing the new, larger shop. Assume all initial investments are incurred immediately (i.e. at the end of 2018) Make sure to calculate annual CCA using a declining-balance depreciation schedule, accounting for the half-year rule (50% rule) for first year of any capital investment. (b) (3 points) What is the NPV of the constructing the new, larger shop? Assume asset pools terminate for CCA tax purposes when assets are sold. Any terminal loss tax shield or recapture CCA is incurred one year the assets are sold