Mustique Health Inc is considering an investment of $1,550,000 in a new diagnostic equipment to detect...

 

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Mustique Health Inc is considering an investment of $1,550,000 in a new diagnostic equipment to detect lung health. The equipment is expected to have a salvage value equal to 8% of the original investment at the end of the project. This asset will generate income of 210,000 a year for the first 3 years and then $360,000 for years 4 through 10. In addition, SQI will also need to invest $75,000 in working capital for the project which is expected to add value to his company. The cost of debt is 15% and the cost of equity is 18%. The weight of debt is 60% and the weight of equity is 40%. The marginal income tax rate is 35% and the assets can be deducted at a 20% declining rate of capital cost allowance. If the new diagnostic equipment is purchased, SQI will replace the existing diagnostic equipment. Existing diagnostic equipment Estimated current selling price $120,000 Current net book value Remaining useful life $200,000 8 years Salvage value at end of useful life $0 Required: In good presentation form, prepare a capital budgeting template to document the benefit, if any that can be expected from this project. Round all amounts to the nearest $100. Ignoring qualitative factors, should SQI invest in this project and why? PV tax shield on CCA- CAT 1+0.5k SdT 1 d+k 1+k d+k (1+k) Where: -C-Cost of asset - d=CCA tax rate -Te-Corporate Tax Rate -k-discount rate - S = Salvage value - n number of periods in the project Mustique Health Inc is considering an investment of $1,550,000 in a new diagnostic equipment to detect lung health. The equipment is expected to have a salvage value equal to 8% of the original investment at the end of the project. This asset will generate income of 210,000 a year for the first 3 years and then $360,000 for years 4 through 10. In addition, SQI will also need to invest $75,000 in working capital for the project which is expected to add value to his company. The cost of debt is 15% and the cost of equity is 18%. The weight of debt is 60% and the weight of equity is 40%. The marginal income tax rate is 35% and the assets can be deducted at a 20% declining rate of capital cost allowance. If the new diagnostic equipment is purchased, SQI will replace the existing diagnostic equipment. Existing diagnostic equipment Estimated current selling price $120,000 Current net book value Remaining useful life $200,000 8 years Salvage value at end of useful life $0 Required: In good presentation form, prepare a capital budgeting template to document the benefit, if any that can be expected from this project. Round all amounts to the nearest $100. Ignoring qualitative factors, should SQI invest in this project and why? PV tax shield on CCA- CAT 1+0.5k SdT 1 d+k 1+k d+k (1+k) Where: -C-Cost of asset - d=CCA tax rate -Te-Corporate Tax Rate -k-discount rate - S = Salvage value - n number of periods in the project

Answer rating: 100% (QA)

Capital Budgeting Template for Mustique Health Inc Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Ye... View the full answer