The Government of Ontario has offered your company, RoadPro Roadways Inc., a contract to transport 50,000 tonnes of asph

[answerhappygod]

The Government of Ontario has offered your company, RoadPro
Roadways Inc., a contract to transport 50,000 tonnes of asphalt
each year for the next five years, as part of a provincial
infrastructure project focusing on the province’s northern roads.
The busy season lasts for four months, beginning after the spring
thaw and wrapping up in the fall. As a small transport company
owner, this contract is desirable for you but you don’t currently
have any extra equipment available. To take the contract you would
need to purchase three highway tractor units, three trailers, and a
wheel loader. The loader and highway tractors could be purchased
used, in good condition. However, it is difficult to find a good
used asphalt trailer, so the trailers would be purchased new. Your
administrative staff is capable of handling the new work without
additional help. The contract specifies first right of refusal (a
type of call option), meaning you are essentially guaranteed the
full tonnage every year. Details, including estimates for cost, are
listed in the table below. Equipment Costs and Salvage Used highway
tractors (price for one) $75,000 New asphalt trailers (price for
one) $25,000 Used wheel loader $65,000 Total fixed asset expected
salvage value $120,000 Expected Revenues and Expenses Contract
revenue $7.00/tonne Labour $31,680/season Fuel $125,000/season
Maintenance $35,000/season Fixed costs* $40,000/season Initial
additional net working capital (NWC) requirement $25,000 Discount
rate 15% Corporate tax rate 25% CCA rate 30% *Includes
administration, permits, and licensing The contract specifies that
revenue will increase by 2.25 percent annually, to offset
inflation. This is an excellent inclusion, but something that
concerns you is the effect of inflation on your cost estimates. You
estimate that the cost of fuel will increase at 2.5 percent per
year while labour, maintenance, and fixed costs will probably
increase at 1.5 percent per year. You expect to recover your NWC at
the end of the project’s life. You are the sole owner of RoadPro
and want a 9 percent return after personal taxes from this project.
Since you are in the highest tax bracket in Ontario, this means a
15 percent rate of return on the after-tax cash flows earned from
the project. Forecast the project’s initial cash outflows Forecast
the annual after-tax cash inflows from sales from the contract for
each of the next five years assuming the cash inflows occur at the
end of each year. Initially assume the base case for capital cost
allowances using a 50 percent allowance for the first year.
Forecast the terminal value for the contract at the end of the last
year assuming that Roadpro has no other equipment in the same asset
class. Calculate the following project values: NPV IRR Payback, in
both full and partial years Based on the values calculated in the
previous question, should Roadpro go with the contract? Assume, for
this question only, that the NPV calculated earlier was exactly
zero. How should this value be interpreted? For an investor, would
an NPV of zero be undesirable? If so, explain why or why not.
Roadpro has to consider the risk involved in this contract. In
terms of the NPV, calculate sequentially, not cumulatively, what
would happen to the NPV of the project in the following cases: The
government changes the CCA rules to triple the first-year deduction
to 150 percent of the calculated amount instead of 50 percent (as
will be the case until 2024 or so). You think you will still be
working in five years’ time, so although the equipment will still
be sold, you estimate that the pool will not be wound down. You
discuss easing your daughter into the business and setting up a
small business with her in charge to serve this contract. The
company will then pay tax at 15 percent, instead of 25 percent, and
she will use an 11 percent discount rate since she is in a much
lower personal tax bracket. You estimate that on termination you
can only recapture 50 percent of the net working capital instead of
100 percent. In discussing the contract around the dinner table
with your family, a number of questions come up. Qualitatively,
assess the importance of the following and discuss how they would
affect the value of the project. Your spouse indicates that you are
going to spend a good part of the limited summer in Northern
Ontario supervising your crew, but have not priced in the value of
your time. She insists that you should look into hiring a part-time
manager to do the job and separate the financial from the operating
side of the business. Your daughter suggests that a good
performance in satisfying this contract will open up additional
opportunities, since government contracts like this one come up all
the time.