rate 45% and MARR-16%. (Assume the asset 1s sold immediately after the end of th

Question

rate 45% and MARR-16%. (Assume the asset 1s sold immediately after the end of the seventh year and that the asset class terminates at that point) (42,070) 2. A company is considering a short-term gravel pit project. It would cost $250,000 to acquire the land required for the gravel pit and the equipment necessary for the project would cost S400,000. In order to finance the project, the company plans to use $350,000 of its own money and borrow $300,000 from a bank. The company has arranged to pay back interest at 12% per year at the end of each year and to pay back the principal at the end of two years After the end of two years, the company believes it will be able to sell the land for $325,000 In addition, the equipment (which is Class 10-30% CCA rate) will have a salvage value of $200,000 after the end of two years. The asset class will terminate upon the sale of the equipment. Over the two year period, the gravel pit operation is expected to generate $500,000 in annual revenues and operating costs are anticipated to equal $150,000 per year. Calculate the present worth of the project if the MARR is 15% and the tax rate is 40% (178,276) 9 2 The following data is for questions 3 and 4. All values are in thousands of dollars. The equipment is Class 10 (30% CCA rate) and the asset class continues in all stuations. Assume a tax rate of 40% and a MARR of 15% and that assets are added to the class in the year of disposal 2 Year Defender Operating&Maintenance; Costs 10 16 9 12 17 Market Value 3 Determine the economic service life of the defender (2 years AE= 10,169) Determine when the defender should be replaced if the challenger has an annual equivalent cost of u 500 at its service life (after 3 ears MC in vea r 4 927)

Explanation / Answer

1 Initial Investment - Cost of land 250000 Cost of Equipment 400000 650000 2 MARR 15% 3 Depreciation - Year Opening balance Depreciation UCC 1 650000 195000 455000 2 455000 136500 318500 4 Post tax salvage value - Salvage value at the end ofproject = (325000+200000) 525000 Book value of equipment 318500 Profit 206500 Tax 40% 82600 Post tax salvage value - (SV - Tax) 442400 5 Calculation of Annual operating cash flows 1 2 Revanue 500000 500000 Operating cost 150000 150000 Less: depreciation 195000 136500 Incremental EBIT 155000 213500 Interest (300000 x 12%) 36000 36000 EBT 119000 177500 Tax 40% 47600 71000 PAT 71400 106500 Add: Depreciation 195000 136500 OCF 266400 243000 6 NPV - 0 1 2 Initial Investments -650000 Borrowing 300000 OCF 266400 243000 Post tax salvage value 442400 Repayment of borrowing -300000 Net Cash flows -350000 266400 385400 PV factors @ 15% 1 0.869565 0.756144 PV of cash flows -350000 231652.2 291417.8 NPV = 173069.9 Please provide feedback…. Thanks in advance…. :-)

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