Reference no: EM131859932
This case is based on Canadian tax law :
Automotive Company is considering investing in a new low-cost hybrid cross-over vehicle.
Development costs, each year for a two-year period, for this new vehicle are estimated as $800,000 and can be written off for tax purposes on a straight-line basis over 2 years. These costs are incurred at the start of year 1 and the start of year 2.
Tooling and other set-up costs in year two are estimated at $1 billion at the start of year 2 and can written of for tax purposes using declining balance capital cost allowance. Two pools of declining balance Undepreciated Capital Cost will used. 75% will be at a rate of 20% and the remainder at 30%.
Actual production and sales of 80,000 units are estimated to begin in year 3. It is anticipated that the plant being envisioned could produce vehicles for 10 years. Each vehicle sold is estimated to provide a 30% contribution margin or $6,300 per vehicle.
Fixed manufacturing costs per year would be $6,000,000. Of these costs, $2,000,000 are incremental are relate specifically to the new hybrid vehicle. This capital expenditure will be depreciated over the useful life using straight line depreciation.
It is estimated that the annual amount of funds tied up inventory and working capital will approximate $3,000,000. The estimated salvage value of the manufacturing plant after 10 years of operation is thought to be $250 million and relates strictly to the assets with the 20% CCA rate. No significant salvage value is expected on the remainder of the capital equipment.
Except for when told otherwise, assume that all cash flows take place at year end. The weighted average cost of capital is 15%. The income tax rate is 35%.
calculation the after-tax cash flows...
NPV