The Government of Ontario has offered your company, RoadPro Roadways Inc., a contract to transport 50,000 tonnes of asphalt each year for the next 5 years , as part of a provincial infrastructure project focusing on the province's northern roads. The busy season lasts for four months, beginning after the spring thaw and wrapping up in the Fall. As a small company this contract is of interest to you, but you don't currently have any extra equipment available. To take the contract you need to purchase three highway tractors, three trailers, and two heavy-duty wheel loaders. The loader and highway tractors could be purchased used, in good condition. However, it is difficult to find a good used asphalt trailer, so they have to be bought new. Your administrative staff is capable of handling most of the new work without significant help, but Roadpro has to meet licensing and permit costs. The contract specifies a first right of refusal meaning that if you want it you are guaranteed the full tonnage every year. Details including cost estimates are listed below: Equipment Costs and Salvage Used highway tractors (price for one) $80,000 New asphalt trailers (price for one) $45,000 Used wheel loader (price for one) $40,000 Fixed asset expected salvage value $150,000 Expected Revenues and Expenses Contract revenue $7.0 0/tonne Labour $33,680/season Fuel $115,000/season Maintenance $38,000/season Fixed costs* $42,000/season Additional net working capital (NWC) $25,000 requirement Discount rate 15% Corporate tax rate 26.5% CCA rate 30% *Includes administration, permits, and licensing The contract specifies that revenue will increase by 1.00% annually, to offset inflation. This is an excellent inclusion, but something that concerns you is the effect of inflation on your cost estimates. You estimate that the cost of fuel will increase at 1.5% per year while labour, maintenance and fixed costs will probably increase at 3.0% per year. You expect to recover your NWC at the end of the projec You are the sole owner of RoadPro, but getting close to retirement and wonder about the economics this contract, particularly in light of the impact of Covid 19. Currently, you can get 8-9% dividend yield low risk shares like Enbridge, Pembina Pipelines and CIBC, which gives you about a 5% after tax low ris return. Given the 5 year commitment and risk, you feel you need to make at least a 7% return after personal taxes from this project. Since you are in the highest personal income tax bracket in Ontario means a 15% rate of return on the project's after corporate tax cash flows. In discussing the contract around the dining room table with your family a number of questions come up. Qualitatively, assess the importance of the following and discuss how they would affect the value of the project. Your spouse indicates that you are going to spend a good part of the limited summer in Northern Ontario supervising your crew. However, you have not priced in the value of your time. She insists that you should look into hiring a part-time manager and separate the family's finances from the economics of this contract. b. Your daughter suggests that a good performance in satisfying this contract will open up additional opportunities, since government contracts like this one come up all the time. Your son indicates that you are only earning 7% if everything goes well, which is only a 2% spread over the yield on low risk shares. Why make a five-year commitment your age he says, relax and take it easy it's not worth the investment? The Government of Ontario has offered your company, RoadPro Roadways Inc., a contract to transport 50,000 tonnes of asphalt each year for the next 5 years , as part of a provincial infrastructure project focusing on the province's northern roads. The busy season lasts for four months, beginning after the spring thaw and wrapping up in the Fall. As a small company this contract is of interest to you, but you don't currently have any extra equipment available. To take the contract you need to purchase three highway tractors, three trailers, and two heavy-duty wheel loaders. The loader and highway tractors could be purchased used, in good condition. However, it is difficult to find a good used asphalt trailer, so they have to be bought new. Your administrative staff is capable of handling most of the new work without significant help, but Roadpro has to meet licensing and permit costs. The contract specifies a first right of refusal meaning that if you want it you are guaranteed the full tonnage every year. Details including cost estimates are listed below: Equipment Costs and Salvage Used highway tractors (price for one) $80,000 New asphalt trailers (price for one) $45,000 Used wheel loader (price for one) $40,000 Fixed asset expected salvage value $150,000 Expected Revenues and Expenses Contract revenue $7.0 0/tonne Labour $33,680/season Fuel $115,000/season Maintenance $38,000/season Fixed costs* $42,000/season Additional net working capital (NWC) $25,000 requirement Discount rate 15% Corporate tax rate 26.5% CCA rate 30% *Includes administration, permits, and licensing The contract specifies that revenue will increase by 1.00% annually, to offset inflation. This is an excellent inclusion, but something that concerns you is the effect of inflation on your cost estimates. You estimate that the cost of fuel will increase at 1.5% per year while labour, maintenance and fixed costs will probably increase at 3.0% per year. You expect to recover your NWC at the end of the projec You are the sole owner of RoadPro, but getting close to retirement and wonder about the economics this contract, particularly in light of the impact of Covid 19. Currently, you can get 8-9% dividend yield low risk shares like Enbridge, Pembina Pipelines and CIBC, which gives you about a 5% after tax low ris return. Given the 5 year commitment and risk, you feel you need to make at least a 7% return after personal taxes from this project. Since you are in the highest personal income tax bracket in Ontario means a 15% rate of return on the project's after corporate tax cash flows. In discussing the contract around the dining room table with your family a number of questions come up. Qualitatively, assess the importance of the following and discuss how they would affect the value of the project. Your spouse indicates that you are going to spend a good part of the limited summer in Northern Ontario supervising your crew. However, you have not priced in the value of your time. She insists that you should look into hiring a part-time manager and separate the family's finances from the economics of this contract. b. Your daughter suggests that a good performance in satisfying this contract will open up additional opportunities, since government contracts like this one come up all the time. Your son indicates that you are only earning 7% if everything goes well, which is only a 2% spread over the yield on low risk shares. Why make a five-year commitment your age he says, relax and take it easy it's not worth the investment