NPV Problem involving CCA and tax rates

Starfire Records needs someone to provide it with 500,000 CD cases per year for the next 5 years. You are trying to decide whether to bid on the contract. You will need to purchase the manufacturing equipment for $2,000,000. The CCA rate is 30%. You expect to be able to sell the equipment for $408,170 at the end of the 5 years. Your fixed production costs will be $250,000 per year. Your variable production costs have been calculated to be $7.50 per box, and you will make an initial investment in working capital of $110,000. Net working capital is not expected to change during the life of the project. Your tax rate is 35% and you require a return of 20% on your investment.
a) What is the minimum bid price you would submit?
b) Assuming the customer agrees to pay $10 per box what is the NPV?
c) Assuming the customer pays $10 per box, what is the change in the NPV of the project is variable costs increase by 5% each year?


I've finished b) and c).
Can someone check it please?

This is my b):
http://img241.imageshack.us/img241/1586/4bay4.jpg
NPV = 348,485.24

This is my c):
http://img382.imageshack.us/img382/5404/4cqq1.jpg
NPV = -232921.31

Thanks for the help.

Hmmm...I'm not too familiar with this stuff, BUT:
why is your 1st year CCA not 600,000 (you have 300,000)?
Using 600,000, I end up with 336,140 after 5 years; this makes the flows:
860,000 ; 797,000 ; 752,900 ; 722,030 ; 700,421 + 336,140 = 1,036,561
which works out to a NPV of 360,617

Also, I'm kinda puzzled with your use of the undepreciated amount as part of the 5th year cash flow;
(I used it because you did)
what something sells for is certainly not automatically what's left undepreciated.

The first year CCA is 300,000 and not 600,000 because of the Government's "half-way rule", something our teacher told us, which only happens on the first year.

2,000,000 x .30 = 600,000

600,000/2 = 300,000

annuity_man said:

The first year CCA is 300,000 and not 600,000 because of the Government's "half-way rule", something our teacher told us, which only happens on the first year.

Click to expand...

I see...if you're asking us to check what you did, it's important that such exceptions be included with the problem,
even if only as a footnote; don't think anybody trying to help out should need to look up "all the rules".

Ok, that being the case, then your NPV using the 5 flows you show is correct.
BUT can you explain this:
1: calculating the CCA (as you did) leaves 408,170 undepreciated at end of year 5, which is correct
2: the problem states: "You expect to be able to sell the equipment for $408,170 at the end of the 5 years"

Is it coincidence (doubtful) that the 2 amounts are equal?
Why would the problem not state:
"You expect to be able to sell the equipment for its undepreciated book value at the end of the 5 years."?

Something else : why is the 110,000 not part of the 5th year flow, increasing it from 1,119,396 to 1,229,396?

Denis said:

Ok, that being the case, then your NPV using the 5 flows you show is correct.
BUT can you explain this:
1: calculating the CCA (as you did) leaves 408,170 undepreciated at end of year 5, which is correct
2: the problem states: "You expect to be able to sell the equipment for $408,170 at the end of the 5 years"

Is it coincidence (doubtful) that the 2 amounts are equal?
Why would the problem not state:
"You expect to be able to sell the equipment for its undepreciated book value at the end of the 5 years."?

Click to expand...

I'm not sure about this, but in all of the problems we have done in class and in the text, the undepreciated value at the end of the number of years always equals the amount that the items are able to be sold for. A.k.a. the salvage value.

Denis said:

Something else : why is the 110,000 not part of the 5th year flow, increasing it from 1,119,396 to 1,229,396?

Click to expand...

Aha! I made a mistake here, it should be 0. Thanks. And this is the "assumption" rule that all (initial Net working capital is recovered at the end of the number of years.)