Truffles Chocolate Factory has decided to expand. Last year, the company paid TCC; a marketing consultant company located in the US, $10,000 ($1US = $1.25Cnd) to do a market study to determine the feasibility of this new project. The project involves purchasing $700,000 worth of new equipment, which belongs to a CCA class that has a CCA rate of 25%. It will cost the firm an additional $30,000 to have the equipment shipped and installed. The equipment has a useful life of 8 years, at which time it can be salvaged for $225,000. The project involves an investment of $85,000 for inventory and they project that accounts payable will also increase by $50,000. The increase in working capital will be released at the termination of the project. The company estimates that the new project will result in an increase in sales by $200,000 per year, for 8 years; however, operating expenses are projected to also increase by $125,000 per year. They have also estimated their existing chocolate sales will decrease by $20,000 per year due to this new project. The company has a marginal tax rate of 40% and has a required rate of return of 12%. Should the company go ahead with the expansive? Use NPV analysis to support your answer.
Truffles Chocolate Factory has decided to expand. Last year, the company paid TCC; a marketing consultant company located in the US, $10,000 ($1US = $1.25Cnd) to do a market study to determine the feasibility of this new project. The project involves purchasing $700,000 worth of new equipment, which belongs to a CCA class that has a CCA rate of 25%. It will cost the firm an additional $30,000 to have the equipment shipped and installed. The equipment has a useful life of 8 years, at which time it can be salvaged for $225,000. The project involves an investment of $85,000 for inventory and they project that accounts payable will also increase by $50,000. The increase in working capital will be released at the termination of the project. The company estimates that the new project will result in an increase in sales by $200,000 per year, for 8 years; however, operating expenses are projected to also increase by $125,000 per year. They have also estimated their existing chocolate sales will decrease by $20,000 per year due to this new project. The company has a marginal tax rate of 40% and has a required
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