**University**

**Subject**

Module Code

Vita Smart Ltd is a leading high-tech company which is incorporated in Surrey, BC. The company wants to add a lab equipment in Dec 2023. They hired you, a UCW graduate, to prepare a capital budgeting plan for the project. Do you recommend the company to accept the project or not?

Below is the information that your manager provided:

- The approximate cost of the machine would be $210,000, with another $10,500 in shipping and handling charges. It would also cost an additional $2,0500 to install the equipment and $500 tuning fee.
- The equipment would be set up in an unused space at the company’s main plant. The plant space could be leased out to another lab for $11,000 per year.
- The machinery has an economic life of 5 years, but the manager didn’t know the CCA classification and CCA rate. He estimated that the machinery is expected to have a salvage value of $18,000 after 4 years of use.
- The new product line would generate incremental sales of 1,350 units per year for 4 years and they are expected to grow 5% per year.
- The variable cost per unit is estimated in $50 per unit in the first Each unit can be sold for $210 in the first year.
- The sales price and cost are both expected to increase due to inflation. The fixed costs are estimated to be $90,000 per year and would increase with inflation. The manager ask you to do the research about the inflation rate in recent years.
- The company hired 3 workers to operate the new equipment and provided them 100 hours paid training according to BC minimum wage. They will work on the production line 35 hours per week under a four year contract with a 15 working days paid leave. The manager estimated the inventory level will increase 5% of the total sales every year due to expansion. The accounting teams said the new project won’t affect A/R and A/P accounts in the future 4
- The company received $25,000 Research fund from BC government and decided to use 20% of them to do a market research on the new
- The manager has concerns about the potential effects on other products when introducing the new Currently, he estimated a 2.5% decrease in sales revenue.
- The firm is a small business which taxable revenue under $300,000. The project is considered by the financial department to be as risky as the company. The financial department has estimate that the total WACC is 12% including $8,000 interest paid every

__Requirements__

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**Part I: Project analysis. Total 85 marks. Q1: 8 marks, Q2-Q12, 7 marks.**

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Write 4 or more complete sentences for each question in a Word file. Do not write in an essay format. References are not necessary unless the questions require. No word limitation in this part.

- State the steps and process of Capital
- What are the principles in determining incremental cash flows?
- What’s the definition of sunk cost? Which cash flow(s) is the sunk cost in the case and why?
- What’s the definition of opportunity cost? Which cash flow(s) is the opportunity cost in the case and why?
- What’s the definition of externality? Which cash flow(s) is the externality in the case? Are they positive or negative?
- What’s definition of NOWC? Which cash flow(s) reflect the change of NOWC in the case?
- What’s CCA in Canadian accounting Estimate the CCA class of the asset in the case and explain.
- What are CCA claim methods according to CRA guidance?
- Why is the interest included in the cash flow estimation? What’s the current interest rate of business loan in BC now? Include reference website(s) where you obtain the
- Is wage a direct cost or an indirect cost? How mush is the minimum wage in BC currently? Include reference website(s) where you obtain the data.
- Why is tax shield important in a business operation? How much is business tax rate in BC and Federal? Include reference website(s) where you obtain the data.
- Will inflation be included in cash flow estimation? What’s mot recent inflation rate in Canada? Include reference website(s) where you obtain the data.

**Part II: Project Evaluation. (Total 15 marks)**

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Using an Excel spreadsheet:

- Find the NPV of the project by using the pro forma financial statement method to determine cash
- Set up the necessary equations by referencing to the input variable The spreadsheet must be
__formula driven__; do not put any numbers in equations, must use cell references. - Use Excel’s
__built-in functions__wherever possible

Present this assignment in a ** professional way**. It is your responsibility to communicate clearly to the marker.

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