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The Government of Ontario has offered your company, RoadPro Roadways Inc., a contra 50,000 tonnes of asphalt each year for the next five years, as
The Government of Ontario has offered your company, RoadPro Roadways Inc., a contra 50,000 tonnes of asphalt each year for the next five years, as part of a provincial infrastru focusing on the province's northern roads. The busy season lasts for four months, beginn spring thaw and wrapping up in the fall. As a small transport company owner, this contra for you but you don't currently have any extra equipment available. To take the contract need to purchase three highway tractor units, three trailers, and a wheel loader. The load highway tractors could be purchased used, in good condition. However, it is difficult to fin asphalt trailer, so the trailers would be purchased new. Your administrative staff is capabl the new work without additional help. The contract specifies first right of refusal (a type o meaning you are essentially guaranteed the full tonnage every year. Details, including esti are listed in the table below. Equipment Costs and Salvage Used highway tractors (price for one) New asphalt trailers (price for one) $75,000 $25,000 Used whecl loader $65.000 Total fixed asset expected salvage value $120,000 Expected Revenues and Expenses Contract revenue Labour Fuel Maintenance Fixed costs* Initial additional net working capital (NWC) requirement $25,000 Discount rate 15% Corporate tax rate 25% CCA rate 30% *Includes administration, permits, and licensing The contract specifies that revenue will increase by 2.25 percent annually, to offset inflation. excellent inclusion, but something that concerns you is the effect of inflation on your cost esti You estimate that the cost of fuel will increase at 2.5 percent per year while labour, maintena fixed costs will probably increase at 1.5 percent per year. You expect to recover your NWC at the project's life. You are the sole owner of Road Pro and want a 9 percent return after person from this project. Since you are in the highest tax bracket in Ontario, this means a 15 percent return on the after-tax cash flows earned from the project. $7.00/tonne $31,680/season $125,000/season $35,000/season $40,000/season
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