Part $2(6$ marks$)$

Management at EnviroChem is considering a project to produce a new line of environmentally friendly

garden fertilizer products. The project will go ahead if the capital recovery cost of the production

equipment does not exceed $$66200.$ The first cost of the production equipment will be $$250000.$ Other

project data are as follows:

As this manufacturing process uses hazardous chemicals in the production of the fertilizer, there is a

mandatory site clean$-$up required at the end of the project. What is the maximum allowable cost of this

clean$-$up if the project is to go ahead? Use a before$-$tax analysis.

Part $3(7$ marks$)$

Together with her three business partners, Suzie Skule, P$.$ Eng., has built up a small engineering

consulting business from scratch over the past $5$ years and now is a $25\%$ owner of a company that is

worth on the order of $$12000000.$ The company is doing well and has a profit of $$1500000$ per year.

Suzie has decided that now that the business is well established, more leisure time is in order and she

now wishes to buy a vacation property in the country. She needs to raise $$700000$ to buy her vacation

property. Her bank manager is willing to lend her that amount, on an interest only basis $($i$.$e$.,$ as long as

the interest is being paid, the $$700000$ does not have to be paid back$),$ for an annual interest rate of

$6\mathrm{.}0\%.$ She doesn't like the idea of paying interest and would prefer to sell a portion of her equity in the

company to raise the money. She believes that there really aren't any costs associated with that approach

as her company currently does not pay any dividends. What advice would you give her? Be sure to

quantify the monetary advantage of your recommendation and explain your recommendation fully.

Would your recommendation change if the company did pay dividends every year? For this question,

ignore any income tax effects.

Part $4(6$ marks$)$

The new Landmark Project in King's College Circle is expected to have maintenance costs of

approximately $$500000$ per year starting a year from now. Costs in subsequent years are expected to

go up by $3\%$ per year. This mirrors the general rate of inflation in Canada. Scott Mabury, the Vice

President of University Operations, would like to minimize project costs by seeking donations to pay

for the facility's maintenance in perpetuity. How much money does the VP need to raise today to fund

the required maintenance in perpetuity? All donations will be invested in the University's endowment

pool which is expected to have an actual rate of return of $8\%$ for the foreseeable future.