Question
Stony Plain Flooring is considering the purchase of a major piece of equipment for its Edmonton manufacturing plant. A research survey was completed last year
Stony Plain Flooring is considering the purchase of a major piece of equipment for its Edmonton manufacturing plant. A research survey was completed last year at a cost of $250,000 that indicated the purchase should go ahead. The project would cost $20m in initial investment and would result in cost savings, before tax, of $7.25m per year for five years. The company took out a loan from the bank to finance the purchase and now has interest costs of $950,000 a year that will last until the end of the project. The equipment could be sold for $3.5m at the end of the five years. The equipment would also result in an increase in NWC of $250,000, which will be recovered at the end of the project. The companys CCA rate is 20% and the corporate tax rate is 40%. Waltons WACC is 7%. a. What is the initial cost of the project? (2 marks) b. Calculate the Present Value of the after tax cost savings (3 marks) c. Using the above information, calculate the Present Value of the CCA tax shield. (3 marks) d. Calculate the Present Value of any other relevant cash flows (2 marks) e. What is the NPV of the proposed purchase? (2 marks) f. Should the purchase go ahead? (1 mark)
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