Question

In: Finance

Bill’s Bootstrap is analyzing whether to go ahead with a project to set up a pop-up...

Bill’s Bootstrap is analyzing whether to go ahead with a project to set up a pop-up store at the Calgary Stampede, which would be operational for the next three years.

Question 19

Part A.

The mini building would cost the company $600,000 today and would be sold at the end of the three years for $0 and have no tax consequences thereafter. With a CCA rate of d = 25%, what are the CCA deductions for the three years of operations?  

Question 20

The Gross Profit of this project will be $370,000 next year and this will grow at a rate of 3% per year for the following two years. They expect 30% of the gross profit in any year will come from customers who would have travelled to purchase their items at the old store, indicating cannibalization. The space for the mini building could be rented out for $100,000 per year, if this project is not taken on. The interest expense for the debt that Bill’s Bootstrap has to take on is $1,500 per year and the tax rate is 30%. What is the Unlevered Net Income for each year of operation?


Part C.Question 21

The net working capital is $9,000 in years 1 and 2 and will be recovered at the end of year 3. The interest rate is 8%. What is the NPV of this project?

Solutions

Expert Solution

Part A) CCA deduction is deduction of depreciation of assets which is allowed while computing income tax, when assets are expected to last for a long period. CCA deduction is allowed as a percentage of cost of the assets less the salvage value of asset. Here the cost of assets is $ 600,000 and the CCA rate is 25% and CCA is considered on the total cost of asset as salvage value is 0, so the deduction applicable for the 1st year is

CCA deduction = CCA rate * Cost of the Asset

= 25% * 600,000

= $ 150,000

Value of Asset left after 1st year = 600,000 - 150,000 = 450,000

CCA deduction for 2nd year = 25% * 450,000

= 112,500

Value of Asset left after 2nd year = 450,000 - 112,500 = 337,500

CCA deduction for 3rd year = 25% * 337,500

= $ 84,375

Total Deduction = 150,000 + 112,500 + 84,375

= $ 346,875

So, the deduction that can be claimed is $ 346,875 for the 3 years.

As multiple questions are asked I have answed the first one. Kindly ask the other question seperately

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The Panhandle Corporation is considering whether to go ahead with a small-scale trial project that requires...
The Panhandle Corporation is considering whether to go ahead with a small-scale trial project that requires an initial outlay of $900,000 and, if successful produce cash inflows of $450,000 in year one followed by $540,000 per year in perpetuity starting at the end of year two. If not successful, the project will produce no cash flows. The probability of success is 38%. Given the extreme riskiness of this project the company decides to use 28% as a risk-adjusted discount rate...
The Panhandle Corporation is considering whether to go ahead with a small-scale trial project that requires...
The Panhandle Corporation is considering whether to go ahead with a small-scale trial project that requires an initial outlay of $900,000 and, if successful produce cash inflows of $450,000 in year one followed by $540,000 per year in perpetuity starting at the end of year two. If not successful, the project will produce no cash flows. The probability of success is 38%. Given the extreme riskiness of this project the company decides to use 28% as a risk-adjusted discount rate...
The Waterhouse Group is considering whether to go ahead with a small-scale trial project that requires...
The Waterhouse Group is considering whether to go ahead with a small-scale trial project that requires an initial outlay of $1,440,000 and, if successful produce cash inflows of $720,000 in year one followed by $864,000 per year in perpetuity starting at the end of year two. If not successful, the project will produce no cash flows. The probability of success is 38%. Given the extreme riskiness of this project the company decides to use 30% as a risk-adjusted discount rate...
Hightech Plc is considering whether or not to go ahead with the production of an innovative...
Hightech Plc is considering whether or not to go ahead with the production of an innovative product. The project (called ‘Project A’) requires an initial investment (at time 0) of £10 million, while the company expects the future cash flows to depend on market demand. If demand is high, starting from next year (time 1) the project will produce a perpetual cash flow of £800,000. In case of low demand, the perpetual cash flow will amount to just £300,000. The...
The management of TTT Co must choose whether to go ahead with either of two mutually...
The management of TTT Co must choose whether to go ahead with either of two mutually exclusive projects, A and B. The expected profits are as follows. Profit if there is strong demand Profit if there is moderate demand Profit if there is moderate demand Option A $ 8,000 $ 2,400 $ (2,000) Option B $ 3,000 $ 2,000 $ 1,000 Probability of demand 0.2 0.3 0.5 Required: (a) Based on expected values, what would be the decision (project A...
If you were given a set of financial statements, how would you go about analyzing them...
If you were given a set of financial statements, how would you go about analyzing them to learn about the company?
Consider a project with a 6-year life. The initial cost to set up the project is...
Consider a project with a 6-year life. The initial cost to set up the project is $450,000. This amount is to be linearly depreciated to zero over the life of the project. The firm expects to be able to sell the equipment for $90,000 after 6 years. The price per unit is $380, variable costs are $304 per unit and fixed costs are $45,000 per year. The project has a required return of 12% and a tax rate of 28%....
Consider a project with a 6-year life. The initial cost to set up the project is...
Consider a project with a 6-year life. The initial cost to set up the project is $1,200,000. This amount is to be linearly depreciated to zero over the life of the project. You expect to sell the equipment for $240,000 after 6 years. The project requires an initial investment in net working capital of $120,000, which will be recouped at the end of the project. You estimated sales of 63,000 units per year at a price of $160 each. The...
Consider a project with a 4-year life. The initial cost to set up the project is...
Consider a project with a 4-year life. The initial cost to set up the project is $1,200,000. This amount is to be linearly depreciated to zero over the life of the project. You expect to sell the equipment for $240,000 after 4 years. The project requires an initial investment in net working capital of $120,000, which will be recouped at the end of the project. You estimated sales of 52,000 units per year at a price of $177 each. The...
Consider a project with a 4-year life. The initial cost to set up the project is...
Consider a project with a 4-year life. The initial cost to set up the project is $1,200,000. This amount is to be linearly depreciated to zero over the life of the project. You expect to sell the equipment for $240,000 after 4 years. The project requires an initial investment in net working capital of $120,000, which will be recouped at the end of the project. You estimated sales of 52,000 units per year at a price of $177 each. The...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT