Question

Investigation and a reasonable amount of work had brought the following project to the attention of Arthur Morgan, CEO of Valentine Ventures.

The following information is presented to you:

CCA rate Building: 4%

CCA rate Equipment: 30%

Cost of Capital 12%

Corporate Tax Rate 40%

• An immediate cash outlay of $800,000 will be required to purchase vacant land. The vacant land will be required to house the specialized building that will be constructed over the next 2 years.

• The building will require an immediate down payment of $700,000 now and $1,300,000 upon completion of the building at the end of the second year.

• New equipment also will be placed in the building at the end of the 2nd year. The equipment will require annual year end purchase payments of $325,000 in year one and two.

• The equipment will require a capital upgrade of $150,000 at the end of the 6th year.

• An inventory of spare parts (working capital) amounting to $70,000 will be required during the economic life of the project and will be required at the end of year two. The inventory of spare parts will not be depleted during the economic life of the project and will be recovered at the end of year 10.

• Other development costs (to be treated as expenses) associated with the new product in the initial two years are estimated to be $25,000 per year at the end of each year.

• Cash Flows will begin in the third year. It is assumed that the revenue and expenses will be acknowledged at the end of each year. Starting in year three, annual revenues from the sale of the new product are expected to be $900,000 per year (before tax) until the 10th year. Starting again in year three, annual expenses are expected to be $420,000 per year (before tax) until the end of the 10th year.

• At the end of the 10th year everything will be sold.

o Building will be sold for $800,000

o Equipment will be sold for $40,000

o Land can be sold for $3,200,000. Any capital gains are subject to 50% exemption.

ROUND ALL ANSWERS TO THE NEAREST DOLLAR and NO COMMAS and NO UNITS OF MEASURE.

a) What is the PV of the initial investment in Land? DON'T FORGET THIS IS NEGATIVE.

b) What is the PV of the investment in Building? DON'T FORGET THIS IS NEGATIVE.

c) What is the PV of the investment in Equipment? DON'T FORGET THIS IS NEGATIVE.

d) What is the PV of the Capital upgrade of Equipment? DON'T FORGET THIS IS NEGATIVE.

e) What is the PV of the Working Capital? DON'T FORGET THIS IS NEGATIVE.

f) What is the PV of the Working Capital RECOVERY?   

g) What is the PV of the Development Costs? DON'T FORGET THIS IS NEGATIVE.

h) What is the PV of the yearly Revenue (Cash Inflows)?

i) What is the PV of the yearly Expenses (Cash outflows)? DON'T FORGET THIS IS NEGATIVE.

j) What is the PV of the sale of the Building?   

k) What is the PV of the sale of the Equipment?

l) What is the PV of the sale of the Land?

m) What is the PV of the capital gains tax on the Land?

DON'T FORGET THIS IS NEGATIVE.

n) What is the PV of the CCA Tax Shield for the Building?

o) What is the PV of the CCA Tax Shield for the Equipment?

Answer 1

1. PV of initial investment in land is $800000.