Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results of the company, which has been mediocre for the

The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results of the company, which has been mediocre for the past couple of years, have been presented in the annual financial statement.
Sales (1 million units x 8$)8000000$
Variable Costs (1 million units x 5$)(5000000)
Fixed Costs (3000000)
Depreciation (2000000)
Annual Profit (loss)(2000000)
According to the experts, the loss has been the results of the poor performance of the equipment in the factory. They suggest to the board of directors to replace the old equipment by a new one. Considering following information, the board of directors asks you to evaluate this project for the company.
The new equipment would increase the level of production by 30%. The purchase (including the installation) of the new equipment requires an initial investment for an amount of 6000000$. The old equipment can be sold in the beginning of project on the market for 500000$ (For simplification, consider this amount as an exchange value).
The new equipment will be sold for 800000$ in 10 years (end of project). The project also requires major renovations of the factory building for a total amount of 900000$ (Major renovations depreciable with declining method under the tax law).
The company also has to build a new building at the beginning of the project for an amount of 1400000$ which will be sold at the end of the project for 2200000$. This amount is depreciable with declining method.
The project also requires an additional investment in new Computers and furniture for a total amount of 300000$ in the beginning of project. Computers and furniture have no salvage value.
At the present time, Smart Inc. is renting a warehouse for the annual rent of 50000$ (paid at the end of year). If the company undertakes the new project, they will need to cancel the lease of the old warehouse and to rent a larger warehouse for the annual rent of 150000$ (to be paid annually at the end of each year).
The project also requires 5 new technicians today with annual salary of 70000$ for each.
Given the performance of new equipment, Smart Inc could lay off 50 employees whose annual salaries is 40000$. The lay-offs will oblige the company to pay lay-off premiums for the total amount of 12000$ to each employee which will be tax deductible.
The corporate tax rate is at 40%. The new equipment is in the category of CCA with depreciation rate of 20%, the major renovations are depreciated at 25%, the new building is depreciated at 10%, these items are depreciate with decreasing (declining) method. The computers and furniture are depreciated by linear method at 10%. Investors require 12% return on this type of project. Given this information, answer the following questions:
Questions:
1. Identify ONE BY ONE each item of the investment and calculate the total investment in this project.
Answer=$8,460,000
2. Identify ONE BY ONE and calculate separately the present value of each periodical cash flow (annual incomes and expenses) during the project.
Answer=$10,146,087
3. Identify ONE BY ONE a
Answer= PV of End Cash Flow= $702,348.72
4. Calculate the Net Present Value of this project (You just have to add up your responses in 1,2 and 3 for this one).
Answer= $2,388,435.72
5. Calculate the Operational Cash Flow (OCF) of the 3rd year of this project.
Answer= OCF for 3rd year= $1,905,742.5
6. Calculate the maximum price that the company can pay
Answer=?????? Need answer to question 6 with all these answers before

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

Public Finance

Authors: Harvey Rosen, Ted Gayer

10th edition

9781259716874, 78021685, 1259716872, 978-0078021688

More Books

Students also viewed these Finance questions

Question

differentiate the function ( x + 1 ) / ( x ^ 3 + x - 6 )

Answered: 1 week ago

Question

Explain the regulation of the secretions of the small intestine.

Answered: 1 week ago