Cascade Heating and Ventilation manufactures customized heating, ventilation, and air conditioning (HVAC) units. They are considering submitting a bid for a project in the Milton area that requires four HVAC units to be installed each year for the life of the three-year contract. The company’s variable cost to manufacture an HVAC unit is $42,000 per unit and the company estimates that it will cost an additional $5,000 per unit in labour costs to install each unit at the customer’s site. The company will also need to increase its fixed costs by $4,000 per year during the project. $20,000 will needed to be invested in working capital and that investment will be fully recovered at the end of the project.

The company will need to purchase an $80,000 specialized machine to manufacture the customized HVAC units. The specialized machine is classified as class 53 and the present value of the CCA tax shield for the new machine, while the company owns it, is estimated to be $10,695.77. It is estimated that the machine can be sold for $8,000 at the end of the project. You may assume assets remain in the asset pool and that there is no terminal loss or gain on the sale of the specialized machine. The tax rate for the company is 20%.

Required:

1. Calculate the OCF AT that the company will require so that it earns 15% on the project? Show your work.
2. Calculate the per unit price that the company will need to charge to earn a 15% return on the project. Show your work.

Answer rating: 100% (QA)

1 We can use the following formula for aftertax OCF OCF Revenue VC Depreciation WC 1 ... View the full answer