A company is considering reconfiguring an existing production line to produce humanitarian aid. To accelerate such development, the company has negotiated a total governmental grant of $300,000 received on two transactions; receipt of $150,000 at the beginning as well as at the end of the first year. Only the first transaction of the grant is payable back with an annual interest rate of 6.25% in lump sum (a single payback amount) paid at the end of the third year. There are two alternatives (configurations) to create the production line as shown below. Tax rate is 13%. The company's real Minimum Attractive Rate of Return (MARR) is 10.5%. Average annual inflation rate is 5.50%. The properties of these investments are provided in the following table (all dollar values are estimated in today's dollars): Equipment Purchase Cost Annual Maintenance cost Annual Sales Production unit cost Product unit sale price Salvage value after 3 years Configuration 1 $522,000 $43,500/year 45,000 units/year $4.5/unit $9.25/unit $170,000 CCA Rate 30% Service life 3 years Configuration 2 $740,000 $64,000/year 52,000 units/year $2.9/unit $9.25/unit $220,000 30% 3 years [a] Create the cash flow diagrams of each alternative in current dollars? Please also put on the cash flow diagram the grant amounts and the payback amount at their correct points in time. [b] What is the appropriate interest rate to be used in discounting (i.e., in calculating NPW of) the cash flows in [a]? [c] Find the undepreciated capital cost of the purchased equipment for each alternative at the end of year 3 for both projects. What is the disposal tax effect for both alternatives due to selling the asset at salvage value? [d] Assume that: the grants are treated for tax purpose as income, that only the interest component of the grant payback is tax deductible, that any negative taxable income will create in a tax refund in the same year, and that the Half-year rule applies. Find the annual taxable income and income taxes for each alternative.. [e] Calculate the NPW of both alternatives taking into account all revenues, expenses, and all taxes at a tax rate of 38% (i.e., for after-tax cash flow). Which alternative is economically better?

A company is considering reconfiguring an existing production line to produce humanitarian aid. To accelerate such development, the company has negotiated a total governmental grant of $300,000 received on two transactions; receipt of $150,000 at the beginning as well as at the end of the first year. Only the first transaction of the grant is payable back with an annual interest rate of 6.25% in lump sum (a single payback amount) paid at the end of the third year. There are two alternatives (configurations) to create the production line as shown below. Tax rate is 13%. The company's real Minimum Attractive Rate of Return (MARR) is 10.5%. Average annual inflation rate is 5.50%. The properties of these investments are provided in the following table (all dollar values are estimated in today's dollars): Equipment Purchase Cost Annual Maintenance cost Annual Sales Production unit cost Product unit sale price Salvage value after 3 years Configuration 1 $522,000 $43,500/year 45,000 units/year $4.5/unit $9.25/unit $170,000 CCA Rate 30% Service life 3 years Configuration 2 $740,000 $64,000/year 52,000 units/year $2.9/unit $9.25/unit $220,000 30% 3 years [a] Create the cash flow diagrams of each alternative in current dollars? Please also put on the cash flow diagram the grant amounts and the payback amount at their correct points in time. [b] What is the appropriate interest rate to be used in discounting (i.e., in calculating NPW of) the cash flows in [a]? [c] Find the undepreciated capital cost of the purchased equipment for each alternative at the end of year 3 for both projects. What is the disposal tax effect for both alternatives due to selling the asset at salvage value? [d] Assume that: the grants are treated for tax purpose as income, that only the interest component of the grant payback is tax deductible, that any negative taxable income will create in a tax refund in the same year, and that the Half-year rule applies. Find the annual taxable income and income taxes for each alternative.. [e] Calculate the NPW of both alternatives taking into account all revenues, expenses, and all taxes at a tax rate of 38% (i.e., for after-tax cash flow). Which alternative is economically better?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 28P

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