Question

You have just started up a new company in Nova Scotia. Your company produces software for the “Doctors Online” company which provides medical assessments and treatment recommendations via combination of online doctor appointments and extensive screening questionnaires. You need to invest $200,000 immediately to purchase computer equipment (CCA class number 45 with a CCA rate of 45% and no salvage value). If the anticipated operating costs (excluding your salary) are $15,000 per year increasing at 5% per year (inflation) and the anticipated revenue is $170,000 per year increasing at 3% per year (inflation), what constant amount can you withdraw each year as salary over the 4 year life of the project if you want the company to make 14 % per year (return on your investment)? For this question disregard taxation effect (tax rate = 0).

a) (2 pts) What will be the annual CCA payments for each year?

c) (2 pts) What will be annual costs and revenues accounting for inflation each year?

d) (2 pts) Draw the cash flow diagram with indication of all cash flows including the unknowns.

e)(4 pts) What will be your salary at the desired rate of return %?

f) If the investment is comprised of $100,000 cash and $ 100,000 from a bank loan charging an effective annual interest rate of 4% with annual payments:

i) (3 pts) What will be the annual payments on the bank loan (amortized loan)? What will be the total amount of interest paid to the bank?

ii) (4 pts) What will be your salary at the desired rate of return % in this case.

Answer 1

• Given, (CCA class number 45 with a CCA rate of 45% and no salvage value)
• Anticipated operating costs (excluding your salary) are $15,000 per year increasing at 5% per year (inflation)
• Anticipated revenue is $170,000 per year increasing at 3% per year (inflation)
• tax rate = 0

A) 45% with no salvage value

    NOTE-In first year we can claim CCA only 50% of 45% which will 22.5 % for First year and 45% for rest of    years.

b)Inflation calculation for second year

• ( revenue $170000*3%=$5100)
• (cost $ 15000*5%=$750)

c)14% Return on investment = $ 200000*14%=$28000 each year return to project

d)net profit- Return om investment

Year	1	Inflation	2	Inflation	3	Inflation	4
Revenue	$170000	$5100	$175100	$5253	$180353	$5410.59	$185763
Costs	$15000	$750	$15750	$472.50	$16222.50	$486.68	$16709
CCA	$45000		$69750		$38362		$21099.38
Profits	110000		$89600		$125768		$147955.04

Salary Withdraw = $82000,   $61600,   $97768,   $119955.04

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