Capital Budgeting Replacement And BC Textile Corporation Case Study - Accounting Assignment Help

Assignment Task

BC Textile Corporation is considering the issue of a new product to be added to its product mix, a new designed textile. They hired you, a recent business graduate from UCW, for conducting the analysis. The production line would be set up in an unused space at the company’s main plant. The plant space could be leased out to another firm for $25,000 per year. They have to buy new machinery to fit the production and will disposal the old machine. The approximate cost of the new machine would be $200,000, with another $10,000 in shipping and handling charges. It would also cost an additional $30,000 to install the equipment. The new machinery has an economic life of 5 years and would fall under Class 8 with a CCA rate of 20%. It is expected to have a salvage value
of $25,000 after 5 years of use.
 

The old machine was purchased 2 years ago before the project with $150,000, plus $30,000 installation fees. It has an economic life of 5 years and would fall under Class 5 with a CCA rate of 15%.
 

Currently the old machine is producing sales of 1,500 units per year in its economic life and the sales are expected to grow 5% per year. The variable cost per unit that the old machine produced is estimated as $75 per unit in the first year. Each unit can be sold for $150 in the first year. The net operating working capital would have to increase by an amount equal to 10% of sales revenues. The company has signed a contract to sell the old machine with $80,000 to accommodate the new machine.

Requirements

1. Using an Excel spreadsheet or write in Word/PDF file:

Find the NPV, and IRR of the project by determine the cash flows. The calculation must be formula driven. Show all the steps in the submission

2. Sensitivity analysis

(a) Perform sensitivity analysis on the unit sales, variable costs and the cost of capital for the project. Assume that each of these variables can vary from its base-case value by ±10% and ±20%. Summarize the results in a table (NPVs for each sensitivity analysis).

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