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The Potato Grow Co . has just completed a market study to access the viability of producing a special brand of potatoes that has been

The Potato Grow Co. has just completed a market study to access the viability of producing a special brand of potatoes that has been developed by McCain's Food Canada for their new variety of low-calorie frozen French fries. Potato Grow will be one of several small companies that will be supplying these potatoes to McCain's. A marketing consultant was paid $50,000 to carry out the work. The results of the study indicate that the company will need to invest $850,000 to purchase some new processing equipment for the project. An additional $45,000 will be required for transportation and setup of the machinery so that it is functional. The equipment will be sold for $150,000 once the project is completed in 5 years.
The company will be able to sell $3,500,000 worth of potatoes to McCain's for each of the years the project is in operation. However, there will also be an increase of $2,650,000 in the company's annual operating costs due to increased labour demands and other costs associated with the project. The company estimates that it will need to purchase extra inventory worth $100,000 at the start of the project to for the increased need for fertilizer, seed and other raw materials due to the project. This investment amount will be released at the end of the project.
The company's corporate tax rate is 36%. The equipment being purchased belongs in a CCA class with a CCA rate of 30 percent. The asset class will remain open at the end of the project. The owners of the business require a 14 percent rate of return in all projects the company undertakes. If the company does not to take this project, it could instead rent out the land it intends to use
2
for the project to a neighbouring farmer for a period of 5 years for a total of $950,000 payable at the start of the rental.
a) Should the company accept the project? Please do the necessary computation and make your conclusion. (18 Marks)
b) What would you expect the internal rate of return of this project to be? Give a range and explain your answer. No calculations required, just an explanation of your answer. (1 Mark)
please provide tep by step calculation.
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