The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results

of the company, which has been mediocre for the past couple of years, have been presented in

the annual financial statement.

Sales

$($

$1$

$$million units x

$8$

$

$)$

$8$

$0$

$0$

$0$

$0$

$0$

$0$

$

Variable Costs

$($

$1$

$$million units x

$5$

$

$)$

$($

$5$

$0$

$0$

$0$

$0$

$0$

$0$

$)$

Fixed Costs

$($

$3$

$0$

$0$

$0$

$0$

$0$

$0$

$)$

Depreciation

$($

$2$

$0$

$0$

$0$

$0$

$0$

$0$

$)$

Annual Profit

$($

loss

$)$

$($

$2$

$0$

$0$

$0$

$0$

$0$

$0$

$)$

According to the experts, the loss has been the results of the poor performance of the equipment

in the factory. They suggest to the board of directors to replace the old equipment by a new one.

Considering following information, the board of directors asks you to evaluate this project for

the company.

$$

$$The new equipment would increase the level of production by

$3$

$0$

$\%$

$.$

$$The purchase

$($

including the installation

$)$

$$of the new equipment requires an initial investment for an

amount of

$6$

$0$

$0$

$0$

$0$

$0$

$0$

$

$.$

$$The old equipment can be sold in the beginning of project on the

market for

$5$

$0$

$0$

$0$

$0$

$0$

$

$($

For simplification, consider this amount as an exchange value

$)$

$.$

$$

$$The new equipment will be sold for

$8$

$0$

$0$

$0$

$0$

$0$

$ in

$1$

$0$

$$years

$($

end of project

$)$

$.$

$$The project

also requires major renovations of the factory building for a total amount of

$9$

$0$

$0$

$0$

$0$

$0$

$

$($

Major renovations depreciable with declining method under the tax law

$)$

$.$

$$

$$The company also has to build a new building at the beginning of the project for an

amount of

$1$

$4$

$0$

$0$

$0$

$0$

$0$

$ which will be sold at the end of the project for

$2$

$2$

$0$

$0$

$0$

$0$

$0$

$

$.$

$$This

amount is depreciable with declining method.

$$

$$The project also requires an additional investment in new Computers and furniture for

a total amount of

$3$

$0$

$0$

$0$

$0$

$0$

$ in the beginning of project. Computers and furniture have

no salvage value.

$$

$$At the present time, Smart Inc. is renting a warehouse for the annual rent of

$5$

$0$

$0$

$0$

$0$

$

$($

paid at the end of year

$)$

$.$

$$If the company undertakes the new project, they will need to

cancel the lease of the old warehouse and to rent a larger warehouse for the annual rent

of

$1$

$5$

$0$

$0$

$0$

$0$

$

$($

to be paid annually at the end of each year

$)$

$.$

$$

$$The project also requires

$5$

$$new technicians today with annual salary of

$7$

$0$

$0$

$0$

$0$

$ for

each.

$$

$$Given the performance of new equipment, Smart Inc could lay off

$5$

$0$

$$employees whose

annual salaries is

$4$

$0$

$0$

$0$

$0$

$

$.$

$$The lay

$-$

offs will oblige the company to pay lay

$-$

off premiums

for the total amount of

$1$

$2$

$0$

$0$

$0$

$ to each employee which will be tax deductible.

The corporate tax rate is at

$4$

$0$

$\%$

$.$

$$The new equipment is in the category of CCA with

depreciation rate of

$2$

$0$

$\%$

$,$

$$the major renovations are depreciated at

$2$

$5$

$\%$

$,$

$$the new building is

depreciated at

$1$

$0$

$\%$

$,$

$$these items are depreciate with decreasing

$($

declining

$)$

$$method$.$ The

computers and furniture are depreciated by linear method at

$1$

$0$

$\%$

$.$

$$Investors require

$1$

$2$

$\%$

$$return

on this type of project. Given this information, answer the following questions:

Questions:

$1$

$.$

$$Identify ONE BY ONE each item of the investment and calculate the total investment

in this project.

$2$

$.$

$$Identify ONE BY ONE and calculate separately the present value of each periodical

cash flow

$($

annual incomes and expenses

$)$

$$during the project.

$3$

$.$

$$Identify ONE BY ONE and calculate separately the present value of each cash flow of

the end of the project.

$4$

$.$

$$Calculate the Net Present Value of this project

$($

You just have to add up your responses

in

$1$

$,$

$2$

$$and

$3$

$$for this one

$)$

$.$

$5$

$.$

$$Calculate the Operational Cash Flow

$($

OCF

$)$

$$of the

$3$

rd year of this project.

$6$

$.$

$$Calculate the maximum price that the company can pay for the new equipment

$($

including installation

$)$

$$to keep the project profitable.