Colex has just developed a new specialty circuit board and is expecting to be in production starting January of 2017. The total cost to purchase the production line equipment is $7 million, which you can assume will be incurred on January 1, 2017. Year-end sales are expected to be $3 million in the first year (2017) growing by a real rate of 35% through the 5th year (i.e. 2021). At that point, sales are expected to drop off quickly, dropping to $6 million in the 6th year (2022), and then by $1 million per year each subsequent until the 10th year (2026) at which point the product line will be shut down and the equipment will be salvaged for an expected $1.5 million. Expenses are assumed to have a fixed and variable component with fixed expenses of $1 million per year plus variable expenses of 30% of revenue. All dollars quoted above are in real dollars. Given the following, determine the present worth of the opportunity: Tax rate of 20% • CCA rate for the production equipment of 30% • Real MARR (after tax) of 10% • Inflation of 2%
Assume that the equipment is one of many in the CCA class and half year rule applies to new purchase. a) Determine the present value of the asset (first cost and salvage value), accounting for tax savings. b) Determine the present value of the revenues for the first 5 years. c) Determine the present value of the revenues for years 6-10. d) Using b) and c) determine the present value of the after tax cash-flows (i.e. account for both the variable and fixed costs, as well as taxes). e) What is the present worth of the project?