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

Question

A company was adding a new product line that required [latex]\$80,000[/latex] of Class 43 equipment [latex](CCA rate = 30\%)[/latex] and initial working capital of [latex]\$55,000[/latex]. The product would have production costs of [latex]\$79,000[/latex] a year and annual revenues of [latex]\$167,000[/latex]. The product would be manufactured for five years and then discontinued, the working capital would be recovered, and the equipment would be sold for [latex]\$5,000[/latex]. To assist in financing the project, the company is borrowing [latex]\$100,000[/latex] at [latex]12\%[/latex] interest. The loan is to be repaid in five equal annual payments. Find the EUAW if [latex]MARR = 10\%[/latex] and [latex]t = 29\%[/latex].

Accepted Answer

The capital recovery factor is used to calculate the payment amount.
Equal annual payment =[latex]\$100,000(A/P, 12\%, 5)[/latex]
=[latex]\$27,741[/latex]

Data
n=	5
MARR=i=	[latex]10\%[/latex]
Loan interest =	[latex]12\%[/latex]
R=	[latex]\$167,000[/latex]
C=	[latex]\$79,000[/latex]
WC =	[latex]\$55,000[/latex]
Equipment P =	[latex]\$80,000[/latex]
S=	[latex]\$5,000[/latex]
d=	[latex]30\%[/latex]
t=	[latex]29\%[/latex]

A repayment schedule is then used to calculate the annual principal and interest payments:

Year	Amount Owing at Start of Year	Interest	Principal Repayment	Amount Owing at End of Year
1	[latex]\$100,000[/latex]	[latex]\$12,000[/latex]	[latex]\$15,741[/latex]	[latex]\$84,259[/latex]
2	84,259	10,111	17,630	66,629
3	66,629	7,995	19,745	46,884
4	46,884	5,626	22,115	24,769
5	24,769	2,972	24,769	0

	0	1	2	3	4	5
Revenue		[latex]\$167,000[/latex]	[latex]\$167,000[/latex]	[latex]\$167,000[/latex]	[latex]\$167,000[/latex]	[latex]\$167,000[/latex]
-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	10,111	7,995	5,626	2,972
=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	[latex]-\$80,000.00[/latex]
Loan (repayment)	100,000.00	-15,741	-17,630	-19,745	-22,115	-24,769
+Net salvage						8,285
Working capital =WC =	55,000.00					55,000
= Net ATCF	(35,000.00)	50,219	50,766	46,876	43,264	103,025

Using the Excel NPV and PMT functions on the Net ACTF row:
Present worth = [latex]\$181,348[/latex]
EUAW =[latex] \$ 47,839[/latex]

Question 12.12: A company was adding a new product line that required $80,00...

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