Capital Budgeting Question Attached.
1. Vextron Inc in Canada is planning on manufacture engine blocks for new vehicles. They expect to sell 250 blocks annually for the next 5 years. The foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA (Capital Cost Allowance) class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
a. What is the depreciation tax shield in the third year for this project?
b. What is the present value of the CCA tax shield?
c. What is the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation?
d.. Assume that management believes that auto restorers will pay $3,000 retail per engine block. What is the NPV of this project?
The solution explains how to calculate the depreciation tax shield, the present value of tax shield, minimum bid price and the NPV of the project.