Smith Electronics Ltd. (Smith) manufactures portable CD and DVD players for a well-known international distributer. As the chief financial officer for Smith, you are currently evaluating a major expansion plan. While the plan itself is likely to have a much longer term impact on the firm?s profitability, Smith has always taken a relatively risk-averse view to capital expenditures and has used a four-year planning horizon, which it will do again in this instance.

A will also be required.

To help with the analysis, the controller?s office has provided the following projected income statements for the project (all figures in 000?s):

Finally, Smith?s marginal tax rate is 35% and its weighted-average cost of capital is 10%. The applicable CCA rates on the new building and the new equipment are 5% and 25%, respectively.

Required

Based on the net present value (NPV) method, determine whether Smith should undertake the proposed expansion plan.

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Revenues Cost of goods sold Amortization Interest expense Tax expense Net income Year 1 $ 10,500 7,500 575 300 744 1,381 Year 2 $ 11,000 7,800 575 300 814 $1,511 Year 3 $ 12,500 8,500 575 300 1,094 $ 2,031 Year 4 $ 13,500 8,800 575 300 1,339 $ 2,486 Revenues Cost of goods sold Amortization Interest expense Tax expense Net income Year 1 $ 10,500 7,500 575 300 744 1,381 Year 2 $ 11,000 7,800 575 300 814 $1,511 Year 3 $ 12,500 8,500 575 300 1,094 $ 2,031 Year 4 $ 13,500 8,800 575 300 1,339 $ 2,486

Answer rating: 100% (QA)

WACC 10 0909091 0826446 0751315 0683013 Year1 Year2 Year... View the full answer