We are going to design and build a brand$-$new manufacturing facility to produce a new kind of high$-$pressure valve assembly

The design of the plant will take $1$ year and is expected to cost $15M$

Manufacturing of the plant will take $1$ year and will cost $85M$ to build and commission

You expect the plant will produce these valves for the next $10$ years, prepare yearly incremental before$-$tax and after$-$tax cash flows

Prepare yearly incremental before$-$tax and after$-$tax cash flows

You plan for the following:

You expect to be able to sell a valve assembly for $$5500$ each

You expect to produce $12,000$ per year at maximum output

In Year $1,$ production is expected to be $70\%$ of max output, Year $2=80\%,$ Year $3=90\%,$ and Year $4$ to $10=100\%$

Given the difficulty in making these valves, you expect $4\%$ of them will not pass quality control and will be effectively garbage

You believe cost of goods sold will be $$3000$ eventually, but in the first year of production it will be $$4000$ and you expect it to decrease by $$200$ each year until it hits $$3000$

Your fixed costs to operate the facility are expected to be $55M$ per year

CCA rate is $25\%$ for the facility, and you will be able to include the costs of design, build, and commission as part of the plant

The corporate income tax rate is $34\%$

This plant will be your only operation, meaning if you ever have negative taxible income, you cannot use it elsewhere $($ie$.$ taxible income cannot be $$$$0)$

a$)$ What is the total pre$-$tax cash flow at the end of $10$ years of production $($including capital costs$)?$ Enter your answer in thousands.

$

b$)$ What is the total after$-$tax cash flow at the end of $10$ years of production $($including capital costs$)?$ Enter your answer is thousands.

$5$

c$)$ What is the maximum contribution margin $($in percent, round to nearest tenths$)?$

$\%$

d$)$ What year had the highest total cost of goods sold? Year

e$)$ What was the highest amount of corporate income tax paid in any year? Enter your answer in thousands. $$

f$)$ What year had the highest after$-$tax cash flow? Year

g$)$ What is the UCC at the end of Year $10$ of operations? Enter your answer in thousands $

h$)$ What was the CCA amount at the end of Year $5$ of operations? Enter your answer in thousands

SOLUTION

a$)$ What is the total pre$-$tax cash flow at the end of $10$ years of production $($including capital costs$)?$ $$77,424$ thousand

b$)$ What is the total after$-$tax cash flow at the end of $10$ years of production $($including capital costs$)?$ $$41,156$ thousand

c$)$ What is the maximum contribution margin $($in percent$)?43\mathrm{.}2\%$

d$)$ What year had the highest total cost of goods sold? Year $4$

e$)$ What was the highest amount of corporate income tax paid in any year? $$6,858$ thousand

f$)$ What year had the highest after$-$tax cash flow? Year $6$

g$)$ What is the UCC at the end of Year $10$ of operations? $$6,570$ thousand

h$)$ What was the CCA amount at the end of Year $5$ of operations? $$9,229$ thousand