Central Drug Mart (COM) is a drugstore chain operating in Ontario and Quebec. The company is contemplating
Question:
Central Drug Mart (COM) is a drugstore chain operating in Ontario and Quebec. The company is contemplating a home delivery service for its prescription drug sales to customers who are unable to pick up their drugs in the stores. COM is investigating whether to invest in small hybrid automobiles. The new delivery service is forecast to increase prescription drug sales by $500,000 per year. COM's total variable costs are 60% of sales. COM will also charge a nominal delivery fee of $3 per delivery.
The new hybrid fleet would cost $890,000 and would have an economic life of 7 years, after which time the salvage value would be $40,000. The company expects to make 13,000 deliveries per year.
On further investigation, COM finds that the new vehicles would save $60,000 per year in fuel costs compared to regular gasoline-powered vehicles. Spare parts inventory of $30,000 would have to be purchased. Assume that the spare parts inventory is purchased at t = 0. COM typically uses a 12% cost of capital. Its tax rate is 30%, and the vehicles fall into a CCA class of 30%.
a. What is the NPV of this fleet delivery project?
b. If the federal government changed the CCA rate to 50% for hybrid vehicles to encourage their use, what would the NPV of the project now be?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Financial Management Theory And Practice
ISBN: 978-0176583057
3rd Canadian Edition
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason