Home Inc. is considering buying a new piece of equipment, which will cost $715,000 and has an economic life of 5 years, in order to make a new line of product. The company supposes they can sell 25,000 units of this new product per year at $130 per unit in every of next 5 years. The unit variable cost is $110 and total fixed costs (excluding CCA) are $195,000 per year.
The CCA rate for the new equipment is 30% and Home Inc. is going to claim the maximum CCA in every of the next 5 years.
Home Inc. Requires to invest $140,000 in net working capital up front which will be fully recovered at the end of 5 years.
The equipment is estimated to be sold at its UCC value at the end of 5 years.
The discount rate is 15% and the tax rate is 35%.
Requirements: Show your calculation
a. Measure the CCA allowance and ending UCC in each of the 5 years.
b. Measure the net income and operating cash flow of this new product for each of the 5 years.
c. Measure the initial investment outlay.
d. Measure the PV of tax shield on CCA.
e. Verify whether Home Inc. should invest in the new equipment using NPV as the evaluation method.