Reference no: EM132777126

A company is considering building a new and improved production facility for one of its existing products. it would be built on a piece of vacant land that the firm owns. this land was acquired four years ago at a cost of $500000. it has a current market value of $800000. the building can be erected for $600000. machinery (equipment) worth $120,000 needs to be bought.the company will finance the construction of the building and purchase of the equipment by borrowing $720,000 for 10 years at 10% interest. interest will be pai annualy and full amount of the loan will be repaid in one payment at the end of 10 years. the companys net working capitalwill increase by$100,000 if the new production facility is built. operating savings from the new production facility are expectedto be $300,000 per year for the next10 years. the total fair market value(salvage value)of the assetsat the end of the 10 yearsis expected to be $1000,000-one quarter of which attributable to the building and equipment will be amortized on a straight line basisover 10 years. the firm tax rate 40% and CCA will be taken on all depreciable assets at a rate of 20%. the firm weightd average cost of capital is estimated at 15%. should the company build the new and improved production facility?

CALCULATE THE FOLLOWING

1 COST OF ACQUISITION

2 Pesent Value of CCA Tax Shield (IN PERPETUITY) on cost of acquisition (net of disposal)

3 Present Value of INCREMENTAL (annual) After-Tax Net Operating Income

4 Increase in Net Working Capital, if any ("INVESTMENT IN NWC")[If "additional investment...", calculate Present Value]

5 Present Value of Decrease in Net Working Capital ("RECOVERY OF NWC")

6 Present Value of Salvage Value (less capital gains tax, if applicable

7 resent Value of Lost Tax Shield due to Salvage Value (at LCP) [Use FORMULA if declining-balance CCA]