Calculate Capital Cost Allowance And Income Tax Payable For A Project

Question

The Vice President of Atlas Ind. prepared a proposal for building a new manufacturing facility in Halifax for producing metering pumps for the pharmaceutical industry. The financial information available for this project is given below:

Project life                               5 years.

Initial equipment cost             $10,000,000

Anticipated net revenue at the end of each year        $2,600,000

Preventive maintenance costs at the end of years 2 and 4     $X

Equipment salvage value        $1,500,000

The minimum attractive rate of return for the company         12%

The capital cost allowance rate for the equipment      30%

The income tax rate for the company             45 %

Determine (considering before tax cash flows):

(a) the maximum value of X that would make the proposed project economically acceptable to Atlas Ind.

(b) the internal rate of return of the project, if X = 0

Also determine:

(c) the capital cost allowance and the terminal loss or recaptured capital cost if any - in the final year of the project.

(d) the income tax payable in the first year of the project

(e) the after tax cash flow in the second year of the project., if X = SI00,000

Summary

The question belongs to Finance and it discusses about calculating internal rate of return, capital cost allowance, income tax payable and after tax cash flow for a project.

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