Basic (Questions 1-34) 1. Relevant Cash Flows (LO1) White Oak Garden Inc. is looking at setting up a new manufacturing plant in London, Ontario, to produce garden tools. The company bought some land six years ago for $3.5 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $3.9 million. The company wants to build its new manufacturing plant on this land; the plant will cost $16.72 million to build, and the site requires $850,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Why?13. Calculating Project OCF (LO3) Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate Page 377 $2,650,000 in annual sales, with costs of $840,000. If the tax rate is 35%, what is the OCF for each year of this project? 14. Calculating Project NPV (LO2) In the previous problem, supposed the required return on the project is 12%. What is the project's NPV?and the system requires an initial investment in net working capital of $29,000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project? 22. Project Evaluation (LO1, 2) Your firm is contemplating the purchase of a new $425,000 computer-based order entry system. The PVCCATS is $91,209, and the machine will be worth $30,000 at the end of the five-year life of the system. You will save $130,000 before taxes per year in order-processing costs and you will be able to reduce working capital by $60,000 (this is a one-time reduction). If the tax rate is 35%, what is the IRR for this project? 23 Project EvaluationThe investment requires a $1,400,000 outlay now. MWC has no other investment opportunities. Assume all cash flows are received at the end of each year. What is the price per share of MWC? 41. Comparing Mutually Exclusive Projects (LO4) Kingsmill Industrial Systems Company (KISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $80,000 in pre-tax annual operating costs. System B costs $375,000, has a six-year life, and requires $74,000 in pre-tax annual operating costs. Both systems are to be depreciated at 30% per year (Class 10) and will have no salvage value. Whichever project is chosen, it will not be replaced when it wears out. If the tax rate is 34% and the discount rate is 8%, which project should the firm choose? 42. Comparing Mutually Exclusive Projects (LO4) Suppose in the previous problem that KISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now? 43. Calculating a Bid Price (LO8) Consider a project to supply 100 million postage stamps per year to Canada Post for the next15. Calculating Profitability Index (LO7) What is the profitability index for the following set of cash flows if the relevant discount rate is 10%? What if the discount rate is 15%? If it is 22%? Year Cash Flow 0 -$14,000 7,300 6,900 5,7003. Calculating Payback (LO2) Mckernan Inc. imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should they accept either of them? Year Cash Flow (A) Cash Flow (B) 0 -$60,000 -$ 70,000 23,000 15,000 28,000 18,000 21,000 26,000 4 8,000 230,000 4. Calculating Discounted Payback (LO3) An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400, and a discount rate of 14%. What is the discounted payback period for these cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What if it is $13,000? 5. Calculating Discounted Payback (LO3) An investment project costs $10,000 and has annual cash flows of $2,900 for six years. What is the discounted payback period if the discount rate is 0%? What if the discount rate is 5%? If it is 19%? 6. Calculating AAR (LO4) You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,854,300, $1,907,600, $1,876,000, and $1,329,500 over these four years, what is the project's average accounting return (AAR)