Question 1: 15 Marks SQI Diagnostics Inc is considering an investment of $1,350,000 in a new diagnostic equipment to detect lung health. The equipment is expected to have a salvage value of $100,000 at the end of the project. This asset will generate income of 220,000 a year for the first 3 years and then $360,000 for years 4 through 10. In addition, SQI will also need to invest $100,000 in working capital for the project which is expected to add value to his company. The cost of debt is 10% and the cost of equity is 15.25%. 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 diagnostict equipment Estimated current selling price $90,000 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 - CdT 1+0.5k SdT Where: - C-Cost of asset d+k 1+k -x- 1 d+k (1+k) - d=CCA tax rate - Te Corporate Tax Rate -k - discount rate S = Salvage value n=number of periods in the project