FNCE 623 Financial Management

Assume no salvage value when calculating the tax shield, and that the half-year rule applies for Class 43. The tax rate Mr. Daniel wants you to utilize is 25%. When calculating the tax shield, the present value should be in the same period as the initial investment (Year 0), which also means that deprecation (i.e., CCA) should not be taken from the cash flows in subsequent years since their tax shelter effects are already accounted for in the tax shield. Reconstruction of Coffee Shops to add yogurt services Mr. Daniel also ask you to evaluate the potential of developing several hundred stores into new store models with frozen yogurt services. 500 stores have been selected as candidates for development. It will cost $80,000 to convert each store, including modifications to refrigeration equipment, with these costs being capitalized with a 6% applicable CCA rate. The average modified coffee shop is expected to generate an additional $30,000 in after-tax cash flow every year. However, OCH is also estimated to lose about $15,000 in annual after-tax cash flow from these cafés due to yogurt sales cannibalizing existing coffee shops. In other words, some customers who normally would have purchased coffee would instead purchase yogurt. The 500 stores have average annual rent of $36,000 each. Mr. Daniel wants you to evaluate the profitability of this investment after a seven-year period using the investment criteria of NPV. Requirements Identify which revenues and costs are relevant to your analysis, and which costs are irrelevant. Summarize all the information that will be required for each investment proposal, including describing the proposal and identifying the time horizon for each proposal evaluation. 2.Calculate the after-tax cash flows during the life of each of the projects. 3.Utilizing the after-tax cash flows from question 2, evaluate each investment proposal utilizing the following criteria (unless directed otherwise): Payback NPV Clearly indicate whether any of the above criteria support each of the project proposals, and what the company should ultimately decide to do.