Abitibi Pulp Ltd. is considering a new product line for its existing table busin

Question

Abitibi Pulp Ltd. is considering a new product line for its existing table business. It has developed a new type of computer table that will protect the computer during an earthquake. It would like you to analyze the feasibility of the venture and suggest a break-even bid price based on the following: Marketing analysis indicates technology companies in Silicon Valley will buy 250 tables each year for 4 year The consultant who did the marketing research charged a fee of $15,000. .The firm estimates that the variable cost per table is $100. For this project, the firm would require additional factory space at an annual cost of $25,000 with overhead, such as heating & lighting costs, amounting to $4,000 per year and wages & salaries totaling $75,000/ year. .The machinery required for the new product line would cost $200,000 and have a salvage value of $50,000 at the end of the project. The machinery belongs to CCA class 16 which has a 15% declining balance rate. Additional working capital of $150,000 would be required to get the project started with 80% recovery at the end The corporate tax-rate is 30% and the required rate of return is 12%. · ·

Explanation / Answer

To calculate Break even bid price we must compare present value of outflow with PV of inflow

A) PV of Inflow = 250 X Price per table X PVAF (12%, 4)

Assume that Price per table be X

= 250x X 3.0373

= 759.34 x

B) PV of Net outflow

Year Particulars Cash Flow Disc Factor PV of Cash flow

0 Marketing research fee 15000 1 15000

1-4 Variable cost (100 X 250) 25000

1-4 Factory space with O/h 25000

1-4 Salary and Wages 75000

1-4 Working capital 150000

1- 4 total of above 1-4 years cost 275000 3.0373 835258

1 Depreciation Tax Shield (9000) 0.8929 (8036)

2 Depreciation Tax Shield ( 7650) 0.7972 (6099)

3 Depreciation Tax Shield ( 6503) 0.7118 (4629)

4 Depreciation Tax Shield (5527 ) 0.6355 (3512)

4 Recovery of Working capital (120000) 0.6355 (76260)

4 Tax shield on capital loss (21848 ) 0.6355 (13884)

(122825-50000) X 30%

Total Present value of outflow 737538   

By comparing A and B

759.34 x = 737538   

Break even Price (x) = 737538/ 759.34

= 971.28

  

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