Vita Smart Ltd is a leading high-tech company which is incorporated in Surrey, BC. The company

wants to add a lab equipment in May 2023. They hired you, a UCW graduate, to prepare a capital

budgeting plan for the project. Do you recommend the company to accept the project or not?

Below is the information that your manager provided:

1. The approximate cost of the machine would be $210,000, with another $10,500 in

shipping and handling charges. It would also cost an additional $29,500 to install the

equipment.

2. The equipment would be set up in an unused space at the companys main plant. The

plant space could be leased out to another firm for $12,000 per year.

3. The machinery has an economic life of 5 years, but the manager didnt know the CCA

classification and CCA rate. He estimated that the machinery is expected to have a

salvage value of $23,000 after 5 years of use.

4. The new product line would generate incremental sales of 1,550 units per year for 5 years

and they are expected to grow 7.5% per year.

5. The variable cost per unit is estimated in $55 per unit in the first year. Each unit can be

sold for $220 in the first year.

6. The sales price and cost are both expected to increase due to inflation. The fixed costs are

estimated to be $100,000 per year and would increase with inflation. The manager ask

you to do the research about the inflation rate in recent years.

7. The company hired 8 workers to operate the new equipment and provided them 100

hours paid training according to BC minimum wage. They will work on the production

line 40 hours per week under a five years contract with a 15 working days paid leave. The

manager estimated the inventory level will increase 15% of the total sales every year due

to expansion. The accounting teams said the new project wont affect A/R and A/P

accounts in the future 5 years.

8. The company received $30,000 Research fund from BC government and decided to use

10% of them to do a market research on the new project. The engineers advised that there

are at least $5,000 for the tunning fees, which will be paid from the funding.

9. The manager has concerns about the potential effects on other products when introducing

the new equipment. Currently, he estimated a 2% decrease in sales revenue.

10. The firm is a small business which annual sales revenue under $500,000. The project is

considered by the financial department to be as risky as the company. The financial

department has estimate that the total WACC is 14% including $10,000 interest paid

every year.