You are considering the purchase of a machine with an expected life of 3 years. It costs $800,000 and belongs to class 10 (CCA
You are considering the purchase of a machine with an expected life of 3 years. It costs $800,000 and belongs to class 10 (CCA rate=30%). Its estimated market value at the end of 3 years equals $125,000. The number of products we expect to sell over the next 3 years is 20,000, 25,000 and 20,000 in years 1, 2 and 3, respectively. Expected price equals $100 per unit, while annual production costs consist of $50,000 in fixed costs and an additional $80 per unit in variable costs. Working capital required equals $30,000 in year 0, and 10% of sales in years 1 through 3. Working capital will be recaptured at the end of year 3. The corporate tax rate is 40%, and the required rate of return for such projects equals 10%. Please answer the following questions with detailed calculation (1) Show your calculation of the project's CCA schedule from year 1 to year 3. (2) What are the net working capital and changes in net working capital for year 0 to year 3? (3) What are the incremental cash flows of this project in year 0, year 1, year 2, and year 3? (4) What is the project's NPV if the cost of capital for this project is 10%?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
1 Calculation of the projects CCA schedule from year 1 to year 3 Class 10 assets have a Capital Cost Allowance CCA rate of 30 To calculate the CCA for each year we need to determine the capital cost a...See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
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