Question
Use the following information to answer Questions: (i) Based on an engineering study completed a year ago at a cost of $50,000. Mohammed Company is
Use the following information to answer Questions:
(i) Based on an engineering study completed a year ago at a cost of $50,000. Mohammed Company is considering whether to construct a new production facility on a plot of land that it already owns. The land has a current market value of si million and was acquired at a cost of $400.000.
(ii) New machinery must be purchased at a cost of $200,000 and a new building must be erected at a cost of $500,000, both of which are eligible for 20% CCA on the declining balance and both of which would have a zero-salvage value at the end of 10 years from today. The land at the end of 10 years is expected to be sold for $1.2 million.
(iii) The new facility is expected to generate operating savings of $500,000 per year at the end of each year for the next 10 years.
(iv) The firm is subject to a 40% regular tax rate and the capital gains are taxed at half this regular tax rate.
(v) The cost of capital is 15% for the project.
What will be the company's initial investment in the project?
What will be the present value of the CCA-based tax savings resulting from the project?
What will be the present value of the expected operating savings as per the information above?
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