Question

Ds Corporation is considering investing in a new 3D printer that has an
estimated life of three years. The cost of the printer is $30,000 and the printer falls under
asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The new equipment will result in sales of 2000 cellphone cases in year 1. Sales are estimated
to grow by 10% per year each year through year 3. The price per case that Ds will
charge its customers is $18 each and is to remain constant. The cases have a cost per unit to
manufacture of $9 each.
Installation of the printer and the resulting increase in manufacturing capacity will require an
increase in various net working capital accounts. It is estimated that Ds needs to
hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its

annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the
35% tax bracket and has a cost of capital of 10%.
a) What is the CCA tax shield in the first and second years?
b) What is the required change in Net Working Capital in the second and third years?

Answer 1

Tax rate			35%
Calculation of annual depreciation
Depreciation		Year-0	Year-1	Year-2
Cost			$     30,000	$     21,000
Dep Rate			30.00%	30.00%
Depreciation	Cost * Dep rate		$        9,000	$        6,300
Closing WDV			$     21,000	$     14,700
Tax shield @ 35%	Depreciation *35%		$        3,150	$        2,205
Calculation of working capital movement
		Year-0	Year-1	Year-2	Year-3
No of units			2,000	2,200	2,420
Selling price			$             18	$             18	$             18
Sale	No of units* sale price		$     36,000	$     39,600	$     43,560
Working capital
Cash	2% of Sale		$           720	$           792	$           871
Accounts receivable	4% of Sale		$        1,440	$        1,584	$        1,742
Inventory	9% of Sale		$        3,240	$        3,564	$        3,920
Accounts payable	5% of Sale		$      (1,800)	$      (1,980)	$      (2,178)
Working capital required			$        3,600	$        3,960	$        4,356
Opneing working capital			$        3,600	$        3,960	$        4,356
Closing working capital		$        3,600	$        3,960	$        4,356	$              -
Movement of working capital	(Closing working capital less opening working capital)	$       (3,600)	$         (360)	$         (396)	$        4,356