Question

Kingston Kiteboards Incorporated (KKI) has been experiencing very strong demand for its products as kite-boarding continues to take away market share from windsurfing. The company is considering a new facility to manufacture an improved line of kites and another facility to produce a new line of boards. The company estimates that the new kite facility will cost $1,250,000 to construct in Year 0 with a salvage value of $150,000 in Year 12. The board manufacturing facility will cost $1,500,000 in Year 0 with a salvage value of $200,000 in Year 12. Combined annual revenue for the new kites and boards is expected to be $800,000 with annual combined operating costs of $300,000 each year. Management has identified a piece of land where both facilities could be built that could be purchased for $500,000 in Year 0. The management team estimates that the land may be sold for the same value of $500,000 at the end of Year 12. The company uses a discount rate of 10% and a tax rate of only 15%. Assume that the CCA rate of 20% can be applied to the land and the manufacturing facilities.

a.  Use the present value tax shield approach to determine the net present value (NPV) of combined project involving both new manufacturing facilities. Should KKI proceed with the investment using these assumptions?

b.  The management team at KKI has decided to take a more conservative approach with some of its estimates. The team feels that the facilities may only last for 10 years and the operating costs may amount to $375,000 per year. However, the company has successfully negotiated a construction cost of $1,000,000 for the kite facility and $1,200,000 for the board facility. (Assume the salvage values are unchanged.) Using the present value tax shield approach, what is the total NPV with these assumptions? Should the company proceed under these revised assumptions?

Please show all steps without using excel

Answer 1

working Noteja Newkite CoA @ 207 = New Kite facility costy 201. 1st year = 2,5 0,000 x 22 = 2,50,000 2nd year = 1st, ear C GA value x remain teau CGA value X ruemaining cost percentage 2,59,000 x 30 2,00,000 3rd year = 2nd year cc A value x 80l. = 2,09 000x80 = 160,000 sve mavining calculation are caltulate to the above Process After tar cost :- Newkite ECA @ 201

revenue - After taux cost year !!- 5,00,000 - 5,52500 In 52,500 2002;. S,00,000 -4,42,000 58,000 Discount date @ 10%. tin CJ) Cl+ 10) te :0.909 yearoz Cito.10² Amounts are in $ = coush flow x Discount rate 1 - 52,000+ 0.900 = 47,727 27 58,000 X 0.826 347933

a computation of Net Dyesent Value Teato revenue Nowkite Boarding/ Lound After tax caush Discount Discounted CCA @ 207 CCA @ 20. CCA @ 207. Cest flow rate @ for cash flow 500,000 C250,000] C3,00,000 C1,00,000](5,52,500 (53,500) 0.909 C43727.27) 2 500,000 (200,000) C2,49,000) (80,000) C4,42,000) 58.000 0.826 47933-88 5,00, 0001C160,000 (1,92,000) C6 4,000) 13,53,600) C26400 0.75) 209.992.49 5,00.000 (1,28,000)|453,600) (5),200) (2,82,880) 3,17,120 0.683 1,48,395388 5 5,00.000 C1,02,400)|(1,22,880) C40,960) (2,26,304) 2,736960-620 169943-68 5,00,000C81.920) (98,304) 632,768) on C1,81043) 13, 18,9570-564 1.8004280 5,00,000 (65536) 678,643 2026,214) C1,44,835) 3,55165 350/3,55165 10.572 0.513 1182,256.03 .8 15,00,000|(52429) | (62,915) |(20,972) C115,868) | 3, 84, 132/0.466 /679, 200.58 9 5,69000C41943) C50, 3323 C16,777) (48,694) 4,07,306 0.424 173737.454 10 5,00,000 (33,554) C40,265) | 213,422) (74,155) 4,25,8450-385 164,181.57 115,00,000 626,844032,212) 40,737 (593243440,676 0.350 1,54,457:17 12 15,00,000 (21,475 (2 1475 168,500 [uzu50714,52,54 il 0.318 144, 193.39 total 159000 200,000 5,00,000 NA 450,000 2,79836.20 it 00100

C A B 1 TDIG F G I FXG year revenue Newkite Boarding / Land aftertas Cash flow Discount Oiscounted rate@oy. Caush Flow! CCA @20. ICCA @ 207 CCA@ Dt. I cost 4,25000 (2,00,000) QQ,00000) 109000) (4; 25000) - 0.909 2 4,25000 C),60,000)| C160.000) Csgooo) C340.000) 85.000 0.826 19247.93 3 4,25,000/(1, 28,000) 1,28,000) 664,000) | C272000) | 153,000 0.751 / 114,957.16 u 4,25,000 (1,02, u00) C1, 02,400 (51,200) | (217,600) | 2,07,400 0.683 | 141,656.99 5 14,25,000 (81,920) (281,920) C40,960 C1, 74,080) 2,50,920 0.620 | 1655,861.58 6 14 25,000 (65536 (65,536)| (32,768) 01, 39,264 2,85,736 10.564 161,990.52 7 14,25,000 (52,429) | (52,429) | C26, 214) A141) 3 13,589 10.513 1,60,920.64 8 425.000 cus, qu3c41943) (209723 1684,120 33558710.466 156,686 3 2 9 4,25,000 (33,554) |(33,554 (16,777, C75,303) 1353,697 10.424 145000198 10 4,25,000|(26,844) |(26,844, (13, 422) | 657,043) 3,67,957 10.385 1 341863.53 Zotal 14,25,000 150000 200000 | Sogooo 8,50,000 0:350 298.99.8)