On March $12,2025,$ Emily Carter, CFO of Horizon Manufacturing Ltd$.,$ was preparing for a meeting with the capital budget committee scheduled for the following week. On her desk was a capital budgeting and investment proposal$$a new product line of insulated doors that the committee was considering for launch. As the head of the finance department, Emily was responsible for working with her team on a detailed capital budgeting analysis and presenting the findings to the capital budget committee for their approval.

Per standard capital budgeting practice, each capital investment project is evaluated using the traditional Net Present Value $($NPV$)$ approach and the Internal Rate of Return $($IRR$)$ criterion to determine whether the company should undertake the project. The company does not frequently engage in large capital projects and, therefore, does not have a well$-$defined required rate of return. Emily knows that the company historically has a $20\%$ payout ratio. As they have retained earnings of approximately $$5,000,000,$ they have traditionally had sufficient dividends to pay this dividend out consistently, even in down years. They do not have any bonds issued, but they have a mortgage on their production facility of $$1,000,000,$ which bears interest at $7\mathrm{.}95\%.$

Emily had several factors to consider in analyzing the capital budgeting project. What would be the basis for calculating the after$-$tax operating cash flows for the capital project? How would she determine the Capital Cost Allowance $($CCA$)$ and working capital requirements for computing the NPV$?$ What assumptions should be made regarding terminal year cash flows? With these questions in mind, Emily dedicated the next few days to the proposed capital budgeting project.

North American Industrial Door Market Industry performance is primarily influenced by demand from the construction and infrastructure sectors$,$ as insulated doors are commonly used in commercial and residential buildings. Industry revenues are projected to grow at $3\mathrm{.}8\%$ annually $($Source: IBIS World$).$ One of the latest innovations in the industry is innovative door technology, which integrates security features and energy efficiency enhancements. The market is dominated by a few key players investing in automation and advanced materials.

Company Background Horizon Manufacturing Ltd$.$ is a mid$-$sized Canadian manufacturer of high$-$performance insulated doors. The company supplies products to wholesalers $($such as Home Hardware$)$ and directly to commercial contractors. Historically, the company maintained a gross margin of approximately $38\%$ but declined to $28\%$ following the pandemic due to supply chain disruptions. The most recent year slightly recovered, with the gross margin rebounding to $32\%.$

Project Investment Proposal Details To enter the smart door market, an investment in a new production line is necessary, as smart doors incorporate electronic and insulation technologies not found in traditional models. The

initial cost of the production equipment and setup is $$2,000,000.$ This amount will be depreciated using the straight$-$line method over $12$ years with no residual value.

The project would require an initial working capital investment of $$300,000$ to support inventory and sample production, with cumulative working capital investment maintained at $4\%$ of each year$$s projected revenue. The increased production capacity would allow the company to meet the rising demand for smart doors. First$-$year sales are projected at $$600,000.$ Emily is uncertain about the growth rate for this product line. Her initial estimate was a $12\%$ annual increase, but she is questioning whether this is too aggressive. The company adjusts its pricing annually based on inflation, as large price jumps are impractical due to contractual obligations with large$-$scale developers.

Operating costs $($repairs$,$ maintenance, insurance, etc.$)$ are typically $6\%$ of the cost of equipment over its lifespan, though these expenses tend to increase toward the later years of use. The equipment qualifies as Class $43$ for CCA purposes. The company is classified as a small business corporation for tax purposes.

Funding The company has access to an existing line of credit to fund the initial capital purchase. This line of credit carries an interest rate of prime plus $2\mathrm{.}5\%.$ Horizon Manufacturing is a private company with backing from institutional investors, and its traditional dividend payout ratio is $20\%.$

She has asked you to assist by preparing a quantitative analysis in a format that is easy to review and could be directly presented to the committee if the project moves forward. She provides you with Appendix $1,$ which outlines the standard template for capital budgeting proposals. Additionally, she seeks your insights on the sensitivity of key assumptions. Which factors could significantly impact the project's feasibility if the initial estimates prove incorrect?

Please format your analysis in a memo that does not exceed four double$-$spaced pages