To overcome this problem, Torus's management decided to launch a new device that will be

installed inside the amplifiers to continuously monitor and stream data related to the functioning

performance of all components.

In this way, issues related to different components will be identified and fixed soon after they

occur without the client involvement. Moreover, this device will provide statistics related to the

quality of components and their behavior in different environments allowing Torus to optimize

the product quality for the client's specific needs.

At the same time by manufacturing this new device, Torus has the opportunity to expand the

scope of the project beyond internal need as other manufacturers of equipment might face the

same issues. After conducting a market research, Torus's management expects that the new

device can be sold externally with minimum adjustments.

Torus decided to set up a separate department with the exclusive mandate of designing,

launching, manufacturing and marketing the new device internally and externally. This new

department would be an investment center.

You as a Torus's controller have to determine if the project is feasible based on the following

estimations provided by the management; the life of the project is 10 years:

The new division will generate revenue from two streams: internal orders for amplifiers and

external clients.

Torus's management estimates that internal sales will be 8,500 units in the first year and it will

increase between 5% and 15% per year the following years.

After internal analysis and discussions, the transfer price of the new device was set up to equal

the variable cost plus 16%.

An analyst hired by Torus estimates that the new division will be able to sell 6000 units in the first year to external clients and it expects a subsequent increase between 3% to 12% year over year. This estimation is based on a selling price of $ 320

The standard usage of materials for the new device is 1.9 meters of copper cable, one chip of

$50, and other raw materials totaling $22. It customary for Torus, to purchase copper cables

only in large rolls of 325 meters at a price of $1,144 per roll.

Assembly workers are paid at an hourly rate of $45 and testers at a rate of $60 per hour.

The company policy is to increase salaries with the inflation rate plus 1%. It is estimated that the

inflation rate will be constant in the foreseeable future at 2 per year.

2

The standard labour required for the device is 3.5 hours for assembly and 1.5 for testing.

The overhead costs will be $300,000 in the first year and expected to increase at a rate of 1%

per year.

Working Capital needed is $400,000, which will be recovered fully at the end of the project.

To promote the new device to external clients, Torus will spend an estimated $200,000 per

year.

Every 2 years an additional $40,000 is required for software development and deployment. The

first software upgrade is expected to take place in year 3.

Depreciation

Total investment in the project is estimated at $3,500,000 from which 20 % will be invested in

software development (no salvage value) Class 10, CCA rate 30%, and the remaining amount

will be used to acquire a new assembly line (Class 8, CCA rate 20%), the assembly line has a

salvage value estimated at 15% of the original price.

WACC

Torus has another $3,000,000 bank loan with an effective interest rate of 7%;

$6,000,000, 8%, 17-year bonds selling at 85% of face value;

$4,500,000 of 8%, $10 noncumulative, non-callable preferred stock with a total market

value of $2,440,000;

100,000 shares of $10 par common stock, with a total current market value of

$6,500,000. The estimated required rate of return on the common stock, based on

application of the CAPM, is 15%.

Other

The firm is subject to a 40% income tax rate, and it uses 10% discount rate.

Require: Calculate NPV&IRR&MIRR in EXCel format