Question
You visit Bloom Lake Railway. Their junior corporate analyst, Sam, is considering upgrading their stationequipment to meet increased demand and lower operating costs as the
You visit Bloom Lake Railway. Their junior corporate analyst, Sam, is considering upgrading their stationequipment to meet increased demand and lower operating costs as the new station equipment is moreenergy efficient. The old station equipment was purchased four years ago at a capital cost of $240,000.When purchased, the old equipment was expected to last ten years with a salvage value of $28,000.New station equipment will cost $365,000, including installation costs. The new equipment is expectedto last six years along with a salvage value of $107,000. The old station equipment could be sold for$110,000 at present. Both the old and new equipment fall into CCA asset class 8 and they follow the CRArequirement of using the declining balance method at a CCA rate of 20 percent. For simplicity, changesin net working capital will be ignored. The railroads weighted average cost of capital is 14 percenttaking into account all opportunity costs. The corporate tax rate is 37 percent. The projections forannual pre-tax revenues and annual pre-tax costs with the new station equipment are:Base Case Upper Bound Lower BoundAnnual Pre-tax Revenues $197,430 $216,723 $135,786Annual Pre-tax Cost $ 87,430 $105,786 $46,723Under which scenario(s) of base-case, best-case or worst-case would you recommend Sam upgrade therailroad companys station equipment on the basis of NPV?Find the IRR for the base-case. Use 27% or 7% as the second rate depending if you need to increase ordecrease the rate. Show all working steps clearly.
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