Southern Industrials is analyzing a project with a projected annual sales of $18

Question

Southern Industrials is analyzing a project with a projected annual sales of $189,400 and costs of $102,300 and requiring an investment of $15,000 in inventory, $28,000 in receivables and $#6,000 in payables(use NWC) . Fixed assets are $80,000 and belong to a 30% CCA class. Interest is $11,000 annually. Project life is 3 years and at the end, the equipment is expected to have a market value of $26,000. Cost of the capital is 14% and tax rate is 34%. Using the Grid overleaf as a guide, complete the “Pro-Forma” income statement and calculate the NPV to determine if this project should go ahead. Asset pool will not be continuing.

Explanation / Answer

Year 0 1 2 3 Beginning UCC $80,000 CCA 30% Ending UCC Sales $                  1,89,400.00 $           1,89,400.00 $                    1,89,400.00 Costs $                  1,02,300.00 $           1,02,300.00 $                    1,02,300.00 Interest $                    11,000.00 $             11,000.00 $                       11,000.00 Depreciation $                    18,000.00 $             18,000.00 $                       18,000.00 EBIT $                    69,100.00 $             69,100.00 $                       69,100.00 Tax 34% $                    19,754.00 $             19,754.00 $                       19,754.00 Net Income $                    38,346.00 $             38,346.00 $                       38,346.00 Investment -49000 Discount rate 14% PV $                    33,636.84 $             29,506.00 $                       25,882.46 NPV $        40,025.30

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