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The treasurer of the Stewart Company, Mr. Johns, has been asked to submit




Question;The;treasurer of the Stewart Company, Mr. Johns, has been asked to submit;his assessment of the feasibility of manufacturing electronic components;to the board of directors at their next meeting. Mr. Johns?;investigation has provided him with the following information:?;This planned expansion of the company?s present activities would;require an investment of $800,000 in equipment having an estimated;service life of six years. He has estimated that the equipment could be;sold for $40,000 at the beginning of the seventh year.?;For accounting purposes, the new manufacturing equipment would be;depreciated over the next six years, using the straight-line method;resulting in depreciation of $126,667 per year. Both the new equipment;and much of the company?s other equipment are grouped in a class of;assets which carries a C.C.A. rate of 20 percent on the declining;balance.?;The Stewart Company has a factory in Mississauga, on the outskirts of;Toronto, which is presently leased to CIC Ltd. For $10,000 per year.;This lease income is taxable. If the lease is broken, the Stewart;Company would be foregoing lease income of $10,000 per year at the end;of each of the next six years. The company would also be required to pay;a penalty of $15,000 (tax deductible). These premises would accommodate;the new equipment, otherwise Stewart does not intend to break the;lease.?;Market studies would have to be undertaken which would cost the Stewart;Company an estimated $200,000 during the first year of the project;(assume that the full amount is paid at the end of year one). In;addition, Mr. Johns has estimated that $200,000 would have to be;invested in the firm?s working capital at the start of the project, and a;further $200,000 in two years time. These sums, however, would be;recoverable at the end of the project.Mr.;Casey, the Marketing Manager, has drawn up budgeted financial;statements and has estimated an increased annual operating revenue of;$500,000 and an increase in operating costs of $100,000. On the basis of;this estimate he has calculated that the project has a quick payback;period and therefore urges that Stewart should immediately invest in the;project.Stewart faces a 40% corporate tax rate and the firm?s required rate of return for projects is 14 percent.Question;Assist Mr. Johns in evaluating the electronic components project, by;calculating the N.P.V., and recommend whether the project should be;accepted or rejected.


Paper#39145 | Written in 18-Jul-2015

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