Question
Using Discount Cash Flow Analysis to Make Investment Decisions. Rio Inc. company is analyzing a project requiring an initial investment of $20 million. At the
Using Discount Cash Flow Analysis to Make Investment Decisions. Rio Inc. company is analyzing a project requiring an initial investment of $20 million. At the end of 7 years the machinery has no further value. The machinery falls into asset Class 38, which has a CCA rate of 30%. The company owns other assets that also fall into this asset class. These other assets will remain in the asset class even after the project ceases to exist after 7 years. The financial manager of the company explains that forecasting of revenues and expenses in this industry can be accurate for 7 years, after that its hazardous. Working Capital required in the beginning is $2,000. As the project gears up in the early years, working capital increases by 5% every year, but in the last year decreased to zero. The company expects to be able to make $20ml as initial revenue. Expenses for year 1 are forecasted $15ml. Inflation is running at about 3% a year and will impact both revenues and expenses. Investors expect a return of 10% from investments in the capital market with the same risk as this project. Reqiure: A) Capital Cost Allowance (CCA), Undepreciated Capital Cost (UCC) and tax shield for year 1-6 considering the half year rule method of depreciation with 30% and tax rate 35%.B) Cash flow from operations, investment and total cash flow. (Do not include CCA tax shield).C) PV of total cash flow (excluding CCA tax shield), PV of CCA tax shield and total net present value.D) Provide recommendations whether this project is acceptable.
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