ASSUMPTIONS FOR THE CAPITAL BUDGET ANALYSIS The following are the assumptions for the production plant and sale of bio-fuel produced by the algae: • Construction of the building and equipment will cost $1,500,000 and $500,000, respectively

Subject:BusinessPrice: Bought3

Share With

ASSUMPTIONS FOR THE CAPITAL BUDGET ANALYSIS The following are the

assumptions for the production plant and sale of bio-fuel produced by the algae: • Construction of the building and equipment will cost $1,500,000 and $500,000, respectively. • The building qualifies for Class 1 (4%) and the equipment qualifies for Class 8 (20%) CCA for income-tax purposes. The half-year rule is applied to both classes in the year of addition. • The company currently has vacant land that is being held for capital appreciation. This land will be used for the building. The land was purchased six years ago for $300,000. Today it is worth $400,000. • The company has incurred development costs to date related to this project of $150,000. • An initial working capital investment of $30,000 is needed for inventory and receivables, which remain unchanged throughout the project life. • Annual revenues will be as follows: o 20X3 $1,400,000 o 20X4 $1,800,000 o 20X5 and each year thereafter $2,300,000 • Cost of goods sold will be 30% of revenue and selling and marketing costs will be 10.2% of revenues. • Fixed operating costs will be $575,000 per year. • These annual cash flows will occur for 10 years which is the estimated life of the project. • At the end of the 10 years, the building can be sold for $250,000, the land can be sold for $400,000, and the equipment will have no value. Assume that there are still assets remaining in the CCA classes at this time after the proceeds of disposition. • For this project, the company pays income taxes at 25% and has a discount rate of 17%


You received the following email outlining the requests.
1. We would like a capital budget analysis prepared for the production plant and for the sale of biomass-based fuel produced by the algae using a net present value analysis. Relevant information has been provided above. Provide a recommendation based on your analysis.
2. We used a lot of assumptions for this capital project analysis. I am concerned that the actual results might be very different from our forecasts. I have read about sensitivity analysis and scenario analysis when it comes to capital budgeting but don't quite understand the difference. We would like an explanation of what each of these terms means. Also, could you provide four examples of factors that this project's outcome might be sensitive to as well as one example of a sensitivity analysis and scenario analysis that could be done?
3. We have been looking at the management of our working capital and need some guidance on how we should finance the investment in our current and long-term assets. We have examined our receivables and inventory and have determined that these accounts, in total, can fluctuate from a low of $950,000 to a high of $1,300,000 during the year. We would also like to maintain about $60,000 in cash as a minimum balance. For the liabilities, our payables are usually 53% of the balance in current assets (permanent or seasonal). We would like you to explain the conservative, aggressive, and moderately conservative strategies using the specific information for our company and identify which strategy BFG appears to be using and its implications.
4. As part of our ongoing objective to reduce costs, we are looking at another supplier for some of our raw materials. Our current supplier, RMM Inc. provides terms of 2/10 net 45, and we have always paid within the discount period. The new supplier we are considering, TSQ Inc. is offering terms of 1/15 net 60. We think that both suppliers provide similar quality of product at the same price. The average amount of each invoice is $10,000. Based on your analysis, which supplier should we choose?
5. We would like a forecast of our net income projected for the next quarter, April to June 20X3. We have gathered the following information:
• sales — $3,900,000 • cost of goods sold — same percentage of sales as 20X2 • selling and marketing — $26,000 • research and development — $95,000 • general and administration — $115,000 • other operating expenses — $4,600 As at April 1, 20X3, the opening cash balance is $76,250 and the line of credit balance is $181,200. Starting in 20X3, the company now earns 1.5% on its cash balance. Note: Assume the cash balance and the line of credit balance do not fluctuate during the quarter. Use number of days to calculate interest expense. Round percentages to two decimals; for example, 26.67%.
Required: Supply the information requested by BFG.