The managers of Magma International, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
a. What is the depreciation tax shield in the third year for this project?
b. What is the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation?
c.Assume that management believes that auto restorers will pay $3,000 retail per engine block. What is the NPV of this project?