Question

Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent ano ther $300,000 to assess the market demand. It would cost $20 million at Year 0 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 % (Sales 1), NOWCI 20%(Sales2), etc.). The efficient snow blowers would sell for $3,000 per unit, and Toefield believes that variable costs would amount to $790 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 2% after year 1. The company's non-variable cests would be $800,000 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. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 5,000 units per year. 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 $500,000. Toefield has other assets in this asset class. Toefleld Inc.'s federal-plusprovincial 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% Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback Key Output: NPV Part 1. Input Data (in thousands of dellars except for unit amount) IRR MIRR Equipment cost Net Operating WC/sales Yearly sales (in units) Sales price per unit Variable cost per unit Non-variable costs 20,000 20% 5,000 Market value of equipment at Year 4 Tax rate $500 30% $3.00 WACC 9% $0.79 Inflation CCA rate 2.0% $800 30.0% Part 2. CCA Schedule Years Beg. UCC 20,000 17,000 11,900 CCA End UCC year 1 year 2 year 3 gear 4 3,000 5,100 3,570 $17,000 $11,900 $8,330 55,831 8,330 2,499 Part 3. Projected Net Cash Flows (Time line of anual e

please fill in andwers in the yellow cells

Answer 1

BASE CASE
Part-1.Input data(Fig.in $ '000)						Market value of equipment	500
Equipment cost	20000					Tax rate	30%
Net opg. WC/sales	20%					WACC	9%
Yearly sales(in units)	5000					Inflation	2%
Sales price/unit	3					CCA rate	30%
Variable cost/unit	0.79
Non-variable cost	800
Part-2-CCA scheulde						Net salvage value
Year	Beg.UCC	CCA	End UCC			Market value	500
1	20000	6000	14000			UCC at end yr.4	4802
2	14000	4200	9800			Loss on salvage	4302
3	9800	2940	6860			tax saved on loss	1720.8
4	6860	2058	4802			Net AT salvage(500+1720.8)	2220.8
Part-3.Projected annual Net cash flows
Year	0	1	2	3	4
1.Initial investment	-20000
Opg. Cash flows:
2.Units sold		5000	5000	5000	5000
3.Sales price		3	3.06	3.12	3.18
4.Variable costs		0.79	0.81	0.82	0.84
5.Sales revenue(2*3)		15000	15300	15606	15918.12
6.Variable costs(2*4)		3950	4029	4109.58	4191.77
7.Non-variable opg.costs		800	816.00	832.32	848.97
8.Depreciation(from above)		6000	4200	2940	2058
9.Opg. Income(EBIT)(5-6-7-8)		4250	6255	7724.1	8819.38
10.Tax at 40%((*40%)		1700	2502	3089.64	3527.75
11.NOPAT(9-10)		2550	3753	4634.46	5291.63
12. Add back:depn.		6000	4200	2940	2058
13.Opg.cash flow(11+12)		8550	7953	7574.46	7349.63
Net working capital
Reqd. level of NWC	3000	3060	3121.2	3183.62	0
14.Reqd. Inv.in NWC	-3000	-60	-61.2	-62.42	3183.62
Terminal year cash flows:
15.Net salvage value					2220.8
16.Net cash flow(1+13+14+15)	-23000	8490	7891.8	7512.04	12754.0532
17.PV F at 95(1/1.09^yr.n)	1	0.91743	0.84168	0.77218	0.70843
18.PV at 9%(16*17)	-23000	7788.991	6642.37	5800.67	9035.29
19.NPV(sum of Row 18)	6267.32
20. IRR(of row 16)	20%
21.MIRR(of row 16)	16%
Payback period
Cumulative CFs(from row 16)	-23000	-14510	-6618.2	893.84	13647.89
P/B=2+(6618.2/7512.04)=
2.88
Years

Sensitivity of NPV to changes in the foll. Variables , keeping all the rest at BASE case level
Deviation %	sales units	Variable costs	Non-Var. costs	Sales price	WACC
-25%	970.86	8241.01	6667.06	-1002.83	7875.21
-10%	4148.74	7056.8	6427.22	3359.26	6894.00
0	6267.32	6267.32	6267.32	6267.32	6267.32
10%	8385.91	5477.85	6107.43	9175.38	5661.49
25%	11563.79	4293.64	5867.59	13537.47	4789.88

The project is recommended as it returns POSITIVE NPV in all the Scenarios ,but for 25% decrease in selling price/unit.