Assignment task:
B Colex is has just developed a new specialty circuit board and is expecting to be in production starting January of 2017. The total cost to install the production line equipment is $7 million, which you can assume will be incurred on January 1, 2017. Sales are expected to be $3 million in the first year (2017) growing by a real rate of 35% through the 5TM year (i.e. 2021). At that point, sales are expected to drop off quickly, dropping to $6 million in the 6TM year (2022), and then dropping by $1 million per year each subsequent until the 10TM year (2026) at which point the product line will be shut down and the equipment will be salvaged for an expected $1.5 million. Expenses are assumed to have a fixed and variable component with fixed expenses of $1 million per year plus variable expenses of 30% of revenue. All dollars quoted above are in real dollars. Given the following, determine the present worth of the opportunity,
Tax rate of 20%
CCA rate for the production equipment of 30%
Real MARR (after tax) of 10%
Inflation of 2%
Clearly show all your work.
a) Determine the present value of the asset, accounting for the tax shield.
b) Determine the present value of the revenues for the first 5 years.
c) Determine the present value of the revenues for years 6-10.
d) Using b) and c) determine the present value of the after tax operating cash-flows (i.e. account for both the variable and fixed costs, as well as taxes but do not include cash-flows associated with the purchase, tax- shield and salvage of the asset).
e) What is the present worth of the project?