Highlights
Task:
Hailey Denison, CPA, has recently accepted a position as a financial analyst with Machine Design and Factory Automation (MDFA) Ltd. Reporting to Dexter Reid, P. Eng., Vice-President of New Product Development, Denison is responsible for preparing detailed feasibility studies of all new products to determine if they are commercially viable prior to being approved for launch.Company policy requires that analysts use the net present value (NPV) method.
Product Review Process
MDFA is an industrial equipment design and manufacturing firm with a reputation for providing its customers with innovative solutions to complex operational problems. The company is divided into three business units: the Ventilation Division produces heating, cooling, and air purification systems; the Surfaces Division makes equipment used to surface roads and pedestrian walkways; and the Factory Automation Division manufactures machine tools and system integration software.
Industrial Air Filtration System (IAFS) Projections
The Ventilation Division will manufacture the IAFS using idle facilities. This plant can produce up to 200 units per year over the product’s 10-year life. An outside appraiser indicated that the plant is worth CAD 2,750,000, which breaks down as CAD 1,250,000 for the land and CAD 1,500,000 for the building. New production equipment costing CAD 5,300,000 is also required. It is believed that the land will have a residual value of CAD 1,500,000 at the end of the project’s life, while the building and equipment will be worth CAD 350,000 and CAD 250,000. The building is subject to a CCA rate of 4.0% and the equipment is subject to a CCA rate of 20.0%. Incremental net working capital of CAD 550,000 is also needed which will be liquidated at the end of the product’s life.
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