Type or paste quBanff Inc. has developed a powerful efficient snow blower that is significantly less polluting than existing snow blowers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent another $400,000 to assess the market demand. It would cost $28 million at Year O to buy the equipment necessary to manufacture the efficient snow blower. The project would require net working capital at the beginning of each year equal to 20% of sales (NOWCO = 20% (Sales1), NOWC1 = 20% (Sales2), etc.). The efficient snow blowers would sell for $3,800 per unit, and the firm believes that variable costs would amount to $880 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 3% after year 1. The company's non-variable costs would be $950,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. The firm believes it could sell 3,400 units per year. The firm thinks that this is an average risk project. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. The firm has other assets in this asset class. Its federal-plus-provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high-risk projects at 12%. Assume that the half-year rule applies to the CCA.estion here

Name: 2 Capital Budgeting Assignment FNCE 301 Winter 2022 3 4 Banff Inc. has developed a powerful efficient snow blower that is significantly less polluting than existing snow blowers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent another $400,000 to assess the market demand. It 0 would cost $28 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would require net i working capital at the beginning of each year equal to 20% of sales (NOWCO = 20%(Sales1), NOWC1 = 20%(Sales2), etc.). The efficient snow 2 blowers would sell for $3,800 per unit, and the firm believes that variable costs would amount to $880 per unit. The company expects that the 3 sales price and variable costs would increase at the inflation rate of 3% after year 1. The company's non-variable costs would be $950,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. The firm believes it could sell 3,400 units per year. The firm thinks that this is an average risk project. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. The firm has other assets in this asset class. Its federal-plus-provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high-risk projects 4 at 12%. Assume that the half-year rule applies to the CCA. 5 6 7 8 9 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 0 1 2 3 Part 1. Input Data (in thousands of dollars except for unit amount) 4 5 Equipment cost 6 Net Operating WC/sales -7 Yearly sales (in units) Tax rate 8 Sales price per unit WACC 9 Variable cost per unit Inflation -0 Non-variable costs CCA rate 1 2 3 Part 2. CCA Schedule 4 year 1 year 3 year 4 -5 Beg. UCC -6 CCA -7 End UCC 8 9 O 1 year 2 0 2 3 4 2 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 3 4 Years 5 Investment Outlaws at Time Zero: 6 Equipment 7 8 Operating Cash Flows over the Project's Life: 9 Units sold o Sales price per unit 1 Variable costs per unit 3 Sales revenue 4 Variable costs 5 Non-variable operating costs 6 Depreciation (equipment) 7 Oper. income before taxes (EBIT) 8 Taxes on operating income 9 Net Operating Profit After Taxes (NOPAT) 0 Add back depreciation 1 Operating cash flow 2 3 Working Capital: 4 Required level of net operating working capital 5 Required investment in NOWC 6 7 Terminal Year Cash Flows: 8 Net salvage value 9 0 Net Cash Flow (Time line of cash flows) 1 2 Part 4. Key Output: Appraisal of the Proposed Project 3 4 Net Present Value 5 IRR 6 MIRR 7 8 Payback (See calculation below) 9 0 Data for Payback Years 1 Net cash flow 2 Cumulative CF 3 Part of year required for payback: 4 5 6 0.00 0.00 0.00 0.00 6 7 b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of 8 units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. 9 0 Evaluating Risk: Sensitivity Analysis 1 2 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 3 and sales prices, holding other thing constant. 4 5 % Deviation 1st YEAR UNIT SALES % Deviation WACC 6 from Units NPV from NPV 7 7 Base Case Sold SO Base Case WACC 0 8 -25% $0 -25% 0.00% $0 9 -10% $0 -10% 0.00% $0 10 0% SO 0% $0 10% $0 10% 0.00% $0 12 25% $0 25% 0.00% $0 3 14 % Deviation VARIABLE COSTS % Deviation SALES PRICE 15 from Variable NPV from Sales NPV 6 Base Case Costs $0 Base Case Price SO 7 -25% 0.00 SO -25% 0.00 $0 -10% 0.00 SO -10% 0.00 SO 0% $0 0% $0 10% 0.00 SO 10% 0.00 SO 1 25% 0.00 SO 25% 0.00 SO WN - OOON 4 5 6 7 8 9 20 1 22 N O O NOU % Deviation NON-VARIABLE COSTS from Fixed NPV Base Case Costs $0 -25% $0 -10% $0 0% $0 10% SO 25% $0 Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be a number, e.g. 1000; you should NOT have the formula, e.g. =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Name: 2 Capital Budgeting Assignment FNCE 301 Winter 2022 3 4 Banff Inc. has developed a powerful efficient snow blower that is significantly less polluting than existing snow blowers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent another $400,000 to assess the market demand. It 0 would cost $28 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would require net i working capital at the beginning of each year equal to 20% of sales (NOWCO = 20%(Sales1), NOWC1 = 20%(Sales2), etc.). The efficient snow 2 blowers would sell for $3,800 per unit, and the firm believes that variable costs would amount to $880 per unit. The company expects that the 3 sales price and variable costs would increase at the inflation rate of 3% after year 1. The company's non-variable costs would be $950,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. The firm believes it could sell 3,400 units per year. The firm thinks that this is an average risk project. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. The firm has other assets in this asset class. Its federal-plus-provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high-risk projects 4 at 12%. Assume that the half-year rule applies to the CCA. 5 6 7 8 9 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 0 1 2 3 Part 1. Input Data (in thousands of dollars except for unit amount) 4 5 Equipment cost 6 Net Operating WC/sales -7 Yearly sales (in units) Tax rate 8 Sales price per unit WACC 9 Variable cost per unit Inflation -0 Non-variable costs CCA rate 1 2 3 Part 2. CCA Schedule 4 year 1 year 3 year 4 -5 Beg. UCC -6 CCA -7 End UCC 8 9 O 1 year 2 0 2 3 4 2 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 3 4 Years 5 Investment Outlaws at Time Zero: 6 Equipment 7 8 Operating Cash Flows over the Project's Life: 9 Units sold o Sales price per unit 1 Variable costs per unit 3 Sales revenue 4 Variable costs 5 Non-variable operating costs 6 Depreciation (equipment) 7 Oper. income before taxes (EBIT) 8 Taxes on operating income 9 Net Operating Profit After Taxes (NOPAT) 0 Add back depreciation 1 Operating cash flow 2 3 Working Capital: 4 Required level of net operating working capital 5 Required investment in NOWC 6 7 Terminal Year Cash Flows: 8 Net salvage value 9 0 Net Cash Flow (Time line of cash flows) 1 2 Part 4. Key Output: Appraisal of the Proposed Project 3 4 Net Present Value 5 IRR 6 MIRR 7 8 Payback (See calculation below) 9 0 Data for Payback Years 1 Net cash flow 2 Cumulative CF 3 Part of year required for payback: 4 5 6 0.00 0.00 0.00 0.00 6 7 b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of 8 units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. 9 0 Evaluating Risk: Sensitivity Analysis 1 2 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 3 and sales prices, holding other thing constant. 4 5 % Deviation 1st YEAR UNIT SALES % Deviation WACC 6 from Units NPV from NPV 7 7 Base Case Sold SO Base Case WACC 0 8 -25% $0 -25% 0.00% $0 9 -10% $0 -10% 0.00% $0 10 0% SO 0% $0 10% $0 10% 0.00% $0 12 25% $0 25% 0.00% $0 3 14 % Deviation VARIABLE COSTS % Deviation SALES PRICE 15 from Variable NPV from Sales NPV 6 Base Case Costs $0 Base Case Price SO 7 -25% 0.00 SO -25% 0.00 $0 -10% 0.00 SO -10% 0.00 SO 0% $0 0% $0 10% 0.00 SO 10% 0.00 SO 1 25% 0.00 SO 25% 0.00 SO WN - OOON 4 5 6 7 8 9 20 1 22 N O O NOU % Deviation NON-VARIABLE COSTS from Fixed NPV Base Case Costs $0 -25% $0 -10% $0 0% $0 10% SO 25% $0 Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be a number, e.g. 1000; you should NOT have the formula, e.g. =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table