Question

Aliya works for an irrigation district that is considering two options for building new infrastructure to expand irrigation. The infrastructure won’t be built for 3 years (so, capital costs will be incurred in 2023). Option A is estimated to cost $5 million in 2020 dollars. It is anticipated that Option A infrastructure could be used for 5 years, then sold for $1 million (in 2028 dollars; this estimate does not need to be adjusted). Estimated additional revenues are $4.2 million per year, and estimated additional operating costs are $1 million per year (both in 2020 dollars). Option B is estimated to cost $8 million in 2020 dollars. Aliya anticipates that Option B could be used for 5 years, then sold for $0.5 million (also in 2028 dollars). Estimated additional revenues are $5.5 million per year, and estimated additional operating costs are $1.8 million per year (both in 2020 dollars). For both options: Capital cost annual inflation is estimated to be 3%. Future revenues and future operating costs are expected to rise at 2% per year. The combined federal and provincial incremental tax rate is 45%. Use a CCA depreciation rate of 45% and a discount rate of 10% (reflecting the MARR of the firm).

a) What is the gain or loss on disposal of Option A?

b) What is the gain or loss on disposal of Option B?

c) Determine the net present worth of the after-tax cash flow for each option, assuming 2023 is year 0.

d) Which option should Ying recommend, or should she recommend not to purchase either?

This is all the information I have, let me still know any specific information you need.

Answer 1