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 another $300,000 to assess the market demand. It would cost $20 million at Year 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). 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 costs 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 5500,000. Toefield has other assets in this asset class. Toefield Inc.'s 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%. a. Develop a spreadsheet model and use it to find the project's NPV, IRR. and payback Part 1. Input Data (in thousands of dollars except for unit amount) Key Output: NPV = IRR - VIRR Equipment cost Net Operating WC/sales Yearly sales (in units) Sales price per unit Variable cost per unit Non-variable costs Market value of equipment at Year 4 Tax rate WACC Inflation CCA rate Part 2. CCA Schedule By UCC CCA Year 1

Answer 1

Description	Values	$ in Mn	$ in Mn	$ in Mn	$ in Mn	$ in Mn
		Y0	Y1	Y2	Y3	Y4
Project cash outflow
Product development	2000000
Marketing Dept	300000
Project outlay	20000000
Total Outflow		-22.3
Working Capital		-3.0	-3.1	-3.1	-3.2	-3.2
No Unit Produces			5000	5000	5000	5000
Sale Price /Unit			3000	3060	3121	3184
Variable cost/ Unit			799	815	831	848
Sale Value			15.0	15.3	15.6	15.9
Variable cost			4.0	4.1	4.2	4.2
Fixed cost			8	8	8	8
Depreceation			6.84	4.79	3.35	2.35
PBT			-3.84	-1.72	-0.23	0.84
Taxes			-1.15	-0.52	-0.07	0.25
PAT			-2.68	-1.21	-0.16	0.59
Operating Cash Flows			4.16	3.58	3.19	2.94
Net Salvage Value						0.5
Net Project Cash Flows		-25.30	1.10	0.46	0.01	0.25
NPV @6%	₹ -22.31
NPV @9%	₹ -21.76
NPV @12%	₹ -21.24
IRR	-66%
MIRR	-46%