You have been working for the company Cov inc for 10 years now. which specializes in bacterial protection equipment. Seeing that there is currently a great Post covid-19 market opportunity, an idea has germinated and you would like to exploit it. Over the past 2 months, it has invested $ 12,500 in research and development and you are analyzing the market analysis data you ordered from a specialist firm. Cov inc. just received the invoice for $ 10,000 for the work done and she has 30 days to make the payment.
To complete this 8-year project, it will have to purchase a new building with land. After several searches, you have found a factory near its main factory. Looking at the tax bill, we see that the land is valued at $ 546,000 and the building is valued at $ 294,000. After several negotiations, you consider that you would be able to buy it for $ 954,000.

Note that notary fees of $ 4,750 and transfer duties of $ 21,450 will also have to be paid to complete this transaction.

After 8 years, the building will have an estimated resale value of $ 120,000 and the land is expected to increase in value 3% per year. At the end of the 8 years, the land will be sold at its market value.
In addition, it will have to invest in new equipment valued at $ 327,000, installation and basic training included. This equipment would have a useful life of 25 years. At the end of its useful life, the resale value will be $ 35,000. It is considered that this type of equipment always loses the same value every year.

Planned annual sales

Years 1 to 4 (end of year): 15,300 u.

Years 5 to 8 (end of year):   26,000 u.

Because of the increase in production, it will be necessary to dedicate working capital of $ 20,000 at the start of the project and increase it by $ 30,000 at the start of the fifth year. The working capital will be recovered at the end of the project.

The committee determined that a unit marginal contribution (margin over unit variable cost) before tax could be expected to be $ 25. The pre-tax fixed operating costs, other than book depreciation, are expected to be $ 123,000 per year for the first four years and will increase to $ 242,000 per year for the remaining years of the project thereafter.
The minimum acceptable rate of return (TRAM) before tax is 11%.
a) Include the acquisition cost and salvage value of the equipment, building and land.
b) Calculate the net present value (NPV) of the project
c) Calculate the equivalent year of the project
d) Calculate the profitability index of the project
e) Calculate the internal rate of return (IRR) (by interpolation) of the project (be precise and take 1% between the two rates)
f) Calculate the recovery time with yield
g) Calculate the TRIM considering a reinvestment rate of 10%
h) Give a recommendation on the project based on your results

Answer rating: 100% (QA)

a The net present value of the project is PV 954000 120000 1118 35000 11125 327000 1118 ... View the full answer