Zaynab Inc. is considering a new 4-year expansion project that consists of setting up a new manufacturing plant. The initial investment in fixed assets is estimated to $3.1 million. The manufacturing plant falls into Class 10 for tax purposes (CCA rate of 30 percent per year). We assume that there is no salvage value for this project which is estimated to generate additional pre-tax sales of 2,500,000 per year. Annual pre-tax variable costs are expected to be $860,000 and annual pre-tax fixed costs would be $240,000 per year. Suppose that the required return on the project is 12 percent and that the corporate tax rate is 35 percent.

a- Compute the OCF at each year of the project.

b- Determine the DOL of the project in the 1st year. What will happen to the OCF if the quantity to be sold decreases by 10%?

c- What is the Present value of the CCA Tax Shield (PVCCATS)?