Question 12.11: A company was adding a new product line that required $80,00...
A company was adding a new product line that required \$80,000 of Class 43 equipment (CCA rate = 30\%) and initial working capital of \$55,000. The product would have production costs of \$79,000 a year and annual revenues of \$167,000. The product would be manufactured for five years and then discontinued, the working capital would be recovered, and the equipment would be sold for \$5,000. To assist in financing the project, the company is borrowing \$100,000 at 12\% interest. The loan interest is to be paid yearly, and the principal is to be repaid in five equal annual payments. Find the equivalent uniform annual worth if MARR = 10\% and t = 29\%.
The data are the same as in Example 12-10, so we can use that spreadsheet, with the addition of a line in the income statement for the loan interest and a line in the “sources and uses” portion for the loans and repayment amounts. These changes are shown below in boldface type.
| Data | |
| n= | 5 |
| MARR=i= | 10\% |
| Loan interest = | 12\% |
| R= | \$167,000 |
| C= | \$79,000 |
| WORKING CAPITAL = WC = | \$ 55,000 |
| Equipment P = | \$80,000 |
| S= | \$5,000 |
| d= | 30\% |
| t= | 27\% |
| End of Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Revenue | \$167,000 | \$167,000 | \$167,000 | \$167,000 | \$167,000 | |
| -Costs | 79,000 | 79,000 | 79,000 | 79,000 | 79,000 | |
| -CCA | 12,000 | 20,400 | 14,280 | 9,996 | 6,997 | |
| Loan interest | 12,000 | 9,600 | 7,200 | 4,800 | 2,400 | |
| =Taxable income | 76,000 | 67,600 | 73,720 | 78,004 | 81,003 | |
| – Income tax | 22,040 | 19,604 | 21,379 | 22,621 | 23,491 | |
| =Net profit | 53,960 | 47,996 | 52,341 | 55,383 | 57,512 | |
| +CCA | 12,000 | 20,400 | 14,280 | 9,996 | 6,997 | |
| =ATCF from operations | 65,960 | 68,396 | 66,621 | 65,379 | 64,509 | |
| -Cap investment | \$(80,000) | |||||
| Loan (repayment) | 100,000 | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) |
| +Net salvage | 8,285 | |||||
| WC = | (55,000) | 55,000 | ||||
| =Net ATCF | (35,000) | 45,960 | 43,396 | 46,621 | 45,379 | 107,794 |
| End of Year | 0 | 1 | 2 | 3 | 4 | 5 |
| UCC of equipment | \$ 80,000 | \$68,000 | \$47,600 | \$33,320 | \$23,324 | \$16,327 |
| Outstanding principal | 100,000 | 80,000 | 60,000 | 40,000 | 20,000 | — |
| Disposal tax effect = | 3,284.77 | |||||
| Net salvage = | 8,284.77 |
| Using the Excel NPV and PMT functions on the Net ACTF row: Present worth = \$179,732 EUAW = \$47,413 |