【正文】 OMM 203 16 Capital Cost Allowance (CCA) ? CCA is the depreciation for tax purpose and its rate is regulated by Revenue Canada. ? Depreciation can reduce taxes, but is not cash flow itself. ? CCA for Revenue Canada may be different from the depreciation reported in panies’ annual report. But CCA rules are relevant for our cash flow calculation. ? Halfyear rule on CCA states that only half of new asset costs can be depreciated at the current year, with the second half depreciated at the year after. Fall 2021 COMM 203 17 Year UCCt CCA UCCt+1 1 $5,000 $1,000 $4,000 2 9,000 1,800 7,200 3 7,200 1,440 5,760 4 5,760 1,152 4,608 5 4,608 922 3,686 6 3,686 737 2,949 Depreciation on $10,000 Furniture (CCA Class 8, 20% rate) Fall 2021 COMM 203 18 Year Class 8Class 10 Class 22 1 $1,000 $1,500 $2,500 2 1,800 2,550 3,750 3 1,440 1,785 1,875 4 1,152 1,250 938 5 922 875 469 6 737 612 234 CCA on Assets of $10,000 by year Fall 2021 COMM 203 19 Example: Fairways Equipment and Operating Costs Two golfing buddies are considering opening a new driving range, the “Fairways Driving Range” (motto: “We always treat you fairly at Fairways”). Because of the growing popularity of golf, they estimate the range will generate rentals of 20,000 buckets of balls at $3 a bucket the first year, and that rentals will grow by 750 buckets a year thereafter. The price will remain $3 per bucket. The required rate of return is 15% Fall 2021 COMM 203 20 Example: Fairways Equipment and Operating Costs (continued) Capital spending requirements include: Ball dispensing machine $ 2,000 Ball pickup vehicle 8,000 Tractor and accessories 8,000 $18,000 All the equipment is Class 10 CCA property, and is expected to have a salvage value of 10% of cost after 6 years. Fall 2021 COMM 203 21 Example: Fairways Equipment and Operating Costs (concluded) Fixed Operating Costs (annual) Land lease $ 12,000 Water 1,500 Electricity 3,000 Labor 30,000 Seed amp。 fertilizer 2,000 Gasoline 1,500 Maintenance 1,000 Insurance 1,000 Misc. Expenses 1,000 $53,000 Variable operating costs 1st year =$3,000 and is expected to grow at 5% per year for the life of the project Working Capital Initial requirement = $3,000 Working capital requirements are expected to grow at 5% per year for the life of the project Anticipated operating expenses are as follows: Fall 2021 COMM 203 22 Example: Fairways Revenues, Depreciation, and Other Costs Projected Revenues Year Buckets Revenues 1 20,000 $60,000 2 20,750 62,250 3 21,500 64,500 4 22,250 66,750 5 23,000 69,000 6 23,750 71,250 Fall 2021 COMM 203 23 Example: Fairways Revenues, Depreciation, and Other Costs Variable operating costs Year Cost 1 $3,000 2 3,150 3 3,308 4 3,473 5 3,647 6 3,829 Fall 2021 COMM 203 24 Depreciation on $18,000 of Class 10 CCA equipment Year UCC t CCA UCC t+1 1 9,000 2,700 $15,300 2 15,300 4,590 10,710 3 10,710 3,213 7,497 4 7,497 2,249 5,248 5 5,248 1,574 3,674 6 3,674 1,102 2,572 Example: Fairways Revenues, Depreciation, and Other Costs Fall 2021 COMM 203 25 Example: Fairways Pro Forma Ine Statement Year 1 2 3 4 5 6 Revenues $60,000 $62,250 $64,500 $66,750 $69,000 $71,250 Variable costs 3,000 3,150 3,308 3,473 3,647 3,829 Fixed costs 53,000 53,000 53,000 53,000 53,000 53,000 Depreciation 2,700 4,590 3,213 2,249 1,574 1,102 EBIT $1,300 $1,510 $4,979 $8,028 $10,779 $13,319 Taxes(20%) 260 302 996 1,606 2,156 2,664 Net ine $1,040 $1,208 $3,983 $6,422 $8,623 $10,655 Fall 2021 COMM 203 26 Example: Fairways Projected Changes in NWC Projected increases in working capital Year Net working capital Change in NWC 0 $ 3,000 $ 3,000 1 3,150 150 2 3,308 158 3 3,473 165 4 3,647 174 5 3,829 182 6 0 3,829 Fall 2021 COMM 203 27 Example: Fairways Operating Cash Flows Operating Year EBIT+ Depreciation – Taxes = cash flow 0 $ 0 $ 0 $ 0 $ 0 1 1,300 2,700 260 3,740 2 1,510 4,590 302 5,798 3 4,979 3,213 996 7,196 4 8,028 2,249 1,606 8,671 5 10,779 1,574 2,156 10,197 6 13,319 1,102 2,664 11,757 PV(OCF)=3740/+5798/+…+11757/ = Fall 2021 COMM 203 28 Example: Fairways Cash Flows (concluded) ? Total cash flow from assets: Year OCF ΔNWC – Cap. Sp. = Cash flow 0 $ 0 $ 3,000 $18,000 – $21,000 1 3,740 150 0 3,590 2 5,798 158 0 5,640 3 7,196 165 0 7,031 4 8,671 174 0 8,497 5 10,197 182 0 10,015 6 11,757 3829 1800 17,386 NPV=21,000+3590/+5640/+…+17386/ =29, Fall 2021 COMM 203 29 Alternative Definitions of OCF Let: OCF = operating cash flow S = sales C = operating costs D = depreciation T = corporate tax rate Fall 2021 COMM 203 30 Alternative Definitions of OCF (concluded) ? The TaxShield Approach OCF = (S C D) + D (S C D) ? T = (S C) ? (1 T) + (D ? T) = (S C) ? (1