Calculate the present value of the cca tax shield

Assignment Help Cost Accounting
Reference no: EM13176342

Shell Solar Water Inc. (SSI) is a market leader in the production and distribution of solar water heating systems throughout the OECS.The company is considering establishing a production plant on the island of Grand Cayman to decrease the cost of its operations. SSI had already purchased some land two years ago for $1,500,000 on which it plans to build its new plant which costs $4,000,000 to house its manufacturing business.The legal fee attached to this purchase was $120,000 and the company believes it can recover this cost through the sales of its systems which it expects to be more than what it currently enjoys.The company uses a CCA rate of 8 percent for the amortizing of its plant which can be scrapped for $780,000 at the end of the project life.

SSI conducted intense market research of two other islands before deciding on opening the plant in Grand Cayman and this research exercise cost the company $70,000.A valuation of the land shows that the land is now worth $3,000,000 because an upscale residential housing facility has been earmarked in the same town of the proposed plant site.This new residential area is projected to increase the firms future cash flows by 15 percent in the first two years and 20 percent in years 3 to 5.The project will last for five years, after which SSI will decide on the way forward.

Equipment used in the production of the systems will cost the company $800,000 and they shall be amortized at a CCA rate of 14 percent. The salvage value of the equipment at the end of the project will be $120,000 and which the company plans to sell to recover some of its expenses.

The company's current market information on its securities is available below for your information:

Debt

Currently selling for 94 percent of par, and pays semi-annual interest.28,000 8 percent coupon bonds are outstanding with 10 years to maturity, Yield to Maturity is 8.92 percent.

Common Stock

Selling for $60.00 per share and has a beta of 1.4. Outstanding amount 350,000

Preferred Stock

22,000 shares, 5 percent preferred outstanding and is selling for $70 per share

Market

Risk Premium 8 percent and treasury bills trade at 6 percent

First Citizens Investment Services Ltd (FCIS) is the lead broker for SSI and highly recommends that SSI issues new shares of common stock to raise the required funds to start the business, instead of using its retained earnings.

The company would need some cash in the sum of $400,000 to take care of its initial expenses in setting up the operation and to meet its client demands for the new systems.At the moment the tax rate for SSI is 25 percent.The board of directors of the company has decided that it will raise all equity for new projects using external funding.

Other relevant information is as follows:

a. The company will incur $400,000 in annual fixed costs,

b. The plant will produce 800 systems per year and sold for $3,000 per system.

c. The annual variable costs are $1,200 per unit

Mr. Brown is the CEO of SSI and has hired you as a financial consultant who will work along with the chief financial officer of the company to determine the Net Present Value of undertaking this new project and to advise whether SSI should set up operations in Grand Cayman.

In preparing your report, you should attempt to:

1. Calculate the initial investment's cashflows as at time 0.

2. Determine the appropriate discount rate to evaluate the project.

3. Calculate the present value of the CCA tax shield adjusted for the salvage value of the plant.

4. Calculate the present value of the CCA tax shield adjusted for the salvage value of the equipment.

5.Determine the present value of after-tax operating cash flows.

6. Calculate the present value of the net working capital.

7. Determine the Net Present Value and advise the company on what they should do.

8. Assess the types of risks that SSI is likely to face by investing abroad.

Reference no: EM13176342

Questions Cloud

What is the mass of the propane in the flask : A 2.00-L flask is filled with propane gas (C3H8) at 1.00 atm and -15.0 degree C. What is the mass of the propane in the flask?
What are the advantages and disadvantages of natural product : What are the advantages and disadvantages of natural products as lead compound?
Calculate the partial pressure of each gas in the container : Three gases (8.00 of methane, CH4, 18.0 of ethane, C2H6, and an unknown amount of propane, C3H8) were added to the same 10.0-L container. At 23.0 degrees Celsius, the total pressure in the container is 3.50 atm. Calculate the partial pressure of e..
Calculate the partial pressure of each gas in the container\ : Three gases (8.00 of methane, CH4, 18.0 of ethane, C2H6, and an unknown amount of propane, C3H8) were added to the same 10.0-L container. At 23.0 degrees Celsius, the total pressure in the container is 3.50 atm. Calculate the partial pressure of e..
Calculate the present value of the cca tax shield : Determine the appropriate discount rate to evaluate the project and calculate the present value of the CCA tax shield adjusted for the salvage value of the plant.
How a change in minimum wage affects the employment : Minimum wage legislation requires most firms to pay workers no less than the legislated minimum wage per hour. Using marginal productivity theory, explain how a change in minimum wage affects the employment of unskilled labor?
Calculate the density of hydrogen bromide gas : calculate the density of hydrogen bromide gas in grams per liter at 733 mmhg and 46 degress celsius.
Use an ice table to determine the equilibrium concentration : When 2.0 mol of CO2(g) is placed in a 5.0-L closed container andheated to a particular temperature, the equilibrium concentration of CO2(g) is measured to be 0.039 mol/L. Use an ICE table to determine the equuilibrium concentrations of CO(g) and O..
State a redox reaction is found to be spontaneous : A redox reaction is found to be spontaneous at standard conditions. Which set of thermodynamics properties is true for this reaction?

Reviews

Write a Review

 

Cost Accounting Questions & Answers

  What would monthly sales in members and dollars

Using the information from part what would monthly sales in members and dollars have to be to achieve a target net income of $10,000 for the month?

  Evaluate wcr expense ratios

ABC Company sells widgets in three varieties (red, yellow and blue) but has lost money for the past three years.

  Determine the present value of the lease payments

Determine the present value of the lease payments at June 30, 2013 (to the nearest $000) that Georgia-Atlantic uses to record the leased asset and lease liability.

  Evaluate the amount of cost of goods sold for the month

Axis uses periodic inventory system. Using FIFO method, evaluate the amount of cost of goods sold for the month?

  Find how much overhead is allocated

Find how much overhead is allocated and evaluate what is the over/under absorbed overhead?

  Evaluate the price would crede charge to maximize revenues

Evaluate the price would Crede charge to maximize revenues? and What price should Crede charge to maximize profits?

  Determine the net benefit to hp

Evaluate whether Product F should be sold or processed further into Product G. Determine the net benefit (cost) of further processing per liter.

  How has role changed and evolved over time

Show the role of the managerial accountant in today's business environment. How has role changed and evolved over time?

  Result of increasingly sophisticated it

Discuss several career opportunities available to students who combine a study of accounting with course work in AISs, information systems, and/or computer science. Can you think of other jobs where these skill sets would be desirable?

  Describe the current costing system

Describe the current costing system and list the potential weaknesses of this system regarding product costing accuracy and cost control and describe the proposed ABC system, the benefits from using it and why those benefits occur.

  Cost of goods sold for next month

Rhinestone Company has a sales budget for subsequently month of $300,000 - the cost of goods sold for next month is expected to be

  What is the investing cash flow

What are the differences in the cash flow concepts and procedures between the direct and indirect methods and what is the operational cash flow, what is the investing cash flow?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd