Calculate Book Value Of Capital Equipment And The Amount For Acquisition

Question

D&R Investments Ltd. wants to acquire Robotic System Inc. - a small enterprise developing software for controlling the operation of automated production units used by automotive manufacturers. Robotic System Inc. employs 56 people. These people work in a rented office located in downtown Mississauga. The company uses computing and other equipment purchased three years ago. The purchase of this capital equipment was partially financed by a loan obtained from the local branch of the Royal Bank.

The latest fiscal year of Robotic System Inc. ended on November 30, 2003. The following financial information is available about this fiscal year:

Revenue          $10,850,000

Salaries            $4,100,000

All other costs (excluding office rent, loan payment and loan interest payment) $2,600,000

Office rent S450,000

Loan payment to the Royal Bank $2,100,000

The interest portion of the loan payment $615,294

CCA (Capital Cost Allowance) for the capital equipment $1,730,000

The CCA (capital cost allowance) rate for the capital equipment is 30%. The income tax rate
is 40%.

D&R Investments Ltd. is willing the pay for the acquisition of Robotic System Inc. no more
than five times the after tax profit Robotic System Inc. earned in its 2003 fiscal year.

Determine:

(a) the book value of the capital equipment on November 30, 2003

(b) the before tax cash flow in the 2003 fiscal year

(c) the taxable income in the 2003 fiscal year

(d) the after tax cash flow in the 2003 fiscal year

(e) the maximum amount D&R Investments Ltd. is willing to pay for the acquisition of Robotic System Inc.

Summary

The question belongs to Finance and it discusses about calculating the book value of capital equipment, before tax cash flow, taxable income and after tax cash flow.

Total Word Count NA