What must the pre-tax cost savings be for us

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Reference no: EM133491130

1. Calculating EAC

A five-year project has an initial fixed asset investment of $285,000, an initial NWC investment of $25,000, and an annual OCF of -$24,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 11%, what is this project's equivalent annual cost, or EAC? (Negative answer should be indicated by a minus sign. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

2. Calculating a Bid Price

Komoka Enterprises needs someone to supply it with 156,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $956,000 to install the equipment necessary to start production. The equipment will be depreciated at 30% (Class 10), and you estimate that it can be salvaged for $101,000 at the end of the five-year contract. Your fixed production costs will be $451,000 per year, and your variable production costs should be $16.70 per carton. You also need an initial net working capital of $106,000. If your tax rate is 35% and you require a 12% return on your investment, what bid price should you submit? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

3. Problem 10-35 Cash Flows and NPV (LO2)
We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows:

Year Unit Sales
1 102,500
2 114,500
3 137,500
4 143,500
5 96,500

The new system will be priced to sell at $490 each.

The cockroach eradicator project will require $1,700,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $360, and total fixed costs are $2,800,000 per year. The equipment necessary to begin production will cost a total of $24 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost.

The relevant tax rate is 35%, and the required return is 14%. Based on these preliminary estimates, what is the NPV of the project? (Enter the answer in dollars. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

4. Calculating Required Savings
A proposed cost-saving device has an installed cost of $600,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax rate is 35%.

a. What must the pre-tax cost savings be for us to favour the investment? We require an 11% return. (Hint: This one is a variation on the problem of setting a bid price.) (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

b. Suppose the device will be worth $84,000 in salvage (before taxes). How does this change your answer? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Reference no: EM133491130

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