Smith inc is thinking about launching a new product. The initial investment in equipment is $600,000....

 

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Smith inc is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $500,000, and operating costs per year is estimated to be $200,000. The project will take place on a land that the firm owns. The investment in the net working capital will be $40,000 at the beginning of the project, but 100% of this will be recovered at the end of year 5, The equipment can be sold at the end of the project for $200,000. There is an on-going feasibility study regarding the project. The feasibility study is done by Tim Consulting Group. They have been paid $70,000 a year ago, and they will be paid another $80,000 today. The company spent $100,000 to renovate the land three years ago. If this project does not take place, the company plans to rent this land for 4 years, and will earn $30,000 per year from the rent (the company will receive the rent at the end of each year with the first rent at the end of year 2). The cost of capital is 10%. The tax rate is 30% and the CCA rate for depreciation purposes is 20%. Use a financial analysis to decide if the company should undertake this project. Show your work for credit Smith inc is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $500,000, and operating costs per year is estimated to be $200,000. The project will take place on a land that the firm owns. The investment in the net working capital will be $40,000 at the beginning of the project, but 100% of this will be recovered at the end of year 5, The equipment can be sold at the end of the project for $200,000. There is an on-going feasibility study regarding the project. The feasibility study is done by Tim Consulting Group. They have been paid $70,000 a year ago, and they will be paid another $80,000 today. The company spent $100,000 to renovate the land three years ago. If this project does not take place, the company plans to rent this land for 4 years, and will earn $30,000 per year from the rent (the company will receive the rent at the end of each year with the first rent at the end of year 2). The cost of capital is 10%. The tax rate is 30% and the CCA rate for depreciation purposes is 20%. Use a financial analysis to decide if the company should undertake this project. Show your work for credit

Answer rating: 100% (QA)

To decide whether Smith Inc should undertake the project we need to calculate the net present value ... View the full answer