Gasfield Maintenance Ltd

Essay

Gasfield Maintenance Ltd.purchased equipment for $225,000 that was CCA Class 8 (CCA rate of 20%).The vehicle was the only item in the Class 8 capital cost allowance pool.The vehicle is expected to generate net cash income, prior to tax effect, in the amount of $75,000 per year.The company uses straight-line depreciation, estimates a 5 year useful life with a $25,000 salvage value for the new equipment at the end of year 5.The marginal tax rate is 35% and the company's average tax rate is 25%.Management requires a rate of return of 15.0%.Assume that cash flows occur at the end of the year.Required:
a.What is the net present value of the investment in the vehicle? Include the effect of taxes in your calculation.
b.What is the anticipated residual income for the first year? The company uses net cash income for its' RI calculations.
c.What is the expected ROI for years one, two, and three assuming the company uses operating income and net book value for the calculations.What is the likely effect from using net book value in the ROI calculation on the management bonus system?