Rick George, Director of ticket sales for Translink, recently put out an RFQ for the supply of new ticketing machines for Skytrain. Translink needs to purchase Thirty (30) new ticketing machines each year for the next five years. In order to bid on the project, you will need to acquire $750,000 of new, specialized metal forming equipment. This equipment is a class 8 asset with a 20% CCA rate, calculated using the Accelerated Investment Incentive method. You believe that you will be able to sell the new equipment for $100,000 at the end of the project. It will cost you $5,000 in labour and supplies to produce each ticketing machine and your fixed overhead will cost $100,000 per year. Net working capital will rise by $50,000 initially but this will all be recovered at the end of the project. Your firm’s tax rate is 40% and the firm’s cost of capital is 20%. How much should we bid to produce each new ticketing machine? The correct value to use for Step #3 – the PV of the tax shield from CCA, is: $162,500 $123,897 $190,909
