manufacturing & processing

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<UManitoba
AA
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10%
Buildings that
use at least 90%
of square footage
I for
manufacturing &
processing
including the
expansion of
these buildings
Tax Shield Formula
Initial Investment x CCA rate x Tax Rate (1 + 0.5 xDiscount Rate)
X
(Discount Rate + CCA rate)
(1 + Discount Rate)
Assume no salvage value when
calculating the tax shields, and that
the half-year rule applies for each
class. The tax rate Mr. Stark 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 O), which
also means that deprecation (ie,
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,
Investment in Restaurant Conversion
5
Mr. Stark also wants you to evaluate
the potential of turning several
existing stores into restaurants,
Fifteen stores have been selected as
candidates for store conversion. It will
cost $580.000 to convert each store
into a restaurant, with these costs
being capitalized with a 6% applicable
CCA rate. The average restaurant is
expected to generate an additional
$300,000 in after-tax cash flow
every year. However, CHI will also
lose the $230,000 in annual after-tax
cash flow it was already earning from
each of the fifteen stores.
The fifteen stores were purchased for
$1,000,000 each eight years ago. Mr.
Stark wants you to evaluate the
profitability of this investment after an
eight year period using the
investment criteria of NPV and
profitability index
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B

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