ADMS3530-Assignment2-W11-Sol

ADMS3530-Assignment2-W11-Sol - AP/ADMS3530 3.0 Assignment#2...

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AP/ADMS3530 3.0 Assignment #2 Winter 2011 Instructions: ______________________________________________________________________ (1) This assignment is to be done individually . You must sign andsubmit the standard cover page supplied as the last page of this assignment . (2) Before you start, please read the note “ Writing Style Required for ADMS3530 Assignments ” posted on the course web site. Please stick to the writing guidelines suggested in the note. (3) This assignment is due in the class of the week of March 21, 2011 . (4) For Internet section students , the assignment must be uploaded to the Centre for Distance Education: http://www.atkinson.yorku.ca/cde/assignmentupload and identified precisely in accordance with the course outline by Tuesday, March 22, 2011, midnight . (5) This assignment must be handwritten . Work that is too difficult to read due to messiness and poor handwriting will receive zero credit. You must show your work to receive full credit. (6) This assignment carries a total mark of 100 points. (7) Late assignments will not be accepted whether for technical or any other reason. (8) Decimal places: please keep at least 4 in your calculations and 2 in your final answers. ______________________________________________________________________
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Question 1- DCF Analysis (20 Marks) Rigger Mortis Corp. is in the business of making whiteboard markers. They are evaluating the potential of investing in some new equipment that will improve their manufacturing process. The initial cost of the new machinery is $470,000 plus a one- time installation cost of $5,000. All ongoing fixed costs related to production is $93,500 per year and variable cost of production is $0.18 per marker produced. Sales estimates for markers are 250,000 units per year over the next 5 years which is also the peak life expectancy of the new machinery. You have signed an agreement with a 3rd party to sell the machinery at 7.5% of the initial cost (excluding installation) at the end of the 5 years. The company’s required return on this project is 12% per year, their corporate tax rate is 38% and the machinery falls into a 25% CCA class. Based on the above information what should be the MINIMUM selling price per marker? Given Informat ion: Discount (r) 12% Tax (T) 38% Units per year 250,000 CCA (d) 25.0% Life (yr) 5 Annual fixed cost $93,500 Initial cost $470,00 0 Variable cost per unit $0.18 Installati on cost $5,000 Annual variable cost $45,000 Net initial cost $475,000 Annual total cost $138,500 Salvage value 7.5% $35,250 Set NPV = 0 and solve for PV of After- Tax Net Operatin g Cash Flows (1) Initial Cost of Equipme nt (Includin g Installati = $475,000.00
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ons) (2) Less: Present Value of Capital Cost Allowanc e Tax Shield = $475000 x 0.25 x 0.38 x 1 + 0.5 x 0.12 0.25 + 0.12 1.1200 minus $35250 x 0.25 x
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ADMS3530-Assignment2-W11-Sol - AP/ADMS3530 3.0 Assignment#2...

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