FNCE623 – Capital Budgeting Assignment





Module Code

Capital Budgeting Assignment

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:


  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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
  8. 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
  9. 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.
  10. 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





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


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.


  1. State the steps and process of Capital
  2. What are the principles in determining incremental cash flows?
  3. What’s the definition of sunk cost? Which cash flow(s) is the sunk cost in the case and why?
  4. What’s the definition of opportunity cost? Which cash flow(s) is the opportunity cost in the case and why?
  5. What’s the definition of externality? Which cash flow(s) is the externality in the case? Are they positive or negative?
  6. What’s definition of NOWC? Which cash flow(s) reflect the change of NOWC in the case?
  7. What’s CCA in Canadian accounting Estimate the CCA class of the asset in the case and explain.
  8. What are CCA claim methods according to CRA guidance?
  9. 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
  10. 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.
  11. 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.
  12. 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)


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.