Calculate Future Value And Maximum Value Of A Project

Question

The Vice President of Comdev Ltd. considers a proposal submitted by its Engineering
Department for creating a DVD disc manufacturing facility at Comdev’s existing Edmonton plant. The financial information supplied by the Engineering Department in support of this project is given
below:

Project life                                                                                                              6 years

Initial equipment cost                                                                                            $4,000,000

End of the year net revenue (total revenue minus costs)

at the end of the first year of the project                                                                   $900,000

Expected increments in the annual end of year net revenue                                         $Y

(i.e., the annual net revenue at the end of the second year is

$900,000 + $Y; at the end of the third year $900,000 + 2$Y; etc.)

Equipment upgrade and preventive maintenance costs

at the end of year 3 of the project (one time cost)                                                       $X

Equipment salvage value                                                                                           Nil

Determine (considering before tax cash flows):

(a) the value of X that would make the future value of the proposed project equal to $1,000,000. Y = $50,000 and the interest rate is 6 % yearly compounding

(b) the maximum value of X that would make the proposed project acceptable for Comdev.
Y = 0 and the MARR is 6 % yearly compounding

(c) the external rate of return of the proposed project. X = 0, Y = 0, and the reinvestment rate is 6 % yearly compounding

(d) the after tax cash flow in the second year of the project. The tax rate is 45% , the CCA (capital cost allowance ) rate is 20 % and Y = 0

Summary

The question belongs to Finance and it discusses about calculating the future value, the maximum value, the external rate of return and the after tax cash flow for a proposed project.

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