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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 5 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 company this contract is of interest to you, but you don't currently have any extra equipment available. To take the contract you need to purchase three highway tractors, three trailers, and two heavy-duty wheel loaders. The loader and highway tractors could be purchased used, in good condition. However, it is difficult to find a good used asphalt trailer, so they have to be bought new. Your administrative staff is capable of handling most of the new work without significant help, but Roadpro has to meet licensing and permit costs. The contract specifies a first right of refusal meaning that if you want it you are guaranteed the full tonnage every year. Details including cost estimates are listed below: Equipment Costs and Salvage Used highway tractors (price for one) $80,000 New asphalt trailers (price for one) $45,000 Used wheel loader (price for one) $40,000 Fixed asset expected salvage value $150,000 Expected Revenues and Expenses Contract revenue $7.0 0/tonne Labour $33,680/season Fuel $115,000/season Maintenance $38,000/season Fixed costs* $42,000/season Additional net working capital (NWC) $25,000 requirement Discount rate 15% Corporate tax rate 26.5% CCA rate 30% *Includes administration, permits, and licensing The contract specifies that revenue will increase by 1.00% 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 1.5% per year while labour, maintenance and fixed costs will probably increase at 3.0% per year. You expect to recover your NWC at the end of the projec You are the sole owner of RoadPro, but getting close to retirement and wonder about the economics this contract, particularly in light of the impact of Covid 19. Currently, you can get 8-9% dividend yield low risk shares like Enbridge, Pembina Pipelines and CIBC, which gives you about a 5% after tax low ris return. Given the 5 year commitment and risk, you feel you need to make at least a 7% return after personal taxes from this project. Since you are in the highest personal income tax bracket in Ontario means a 15% rate of return on the project's after corporate tax cash flows. 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 in the following cases: The government changes the CCA rules to triple the first year deduction to 150% of the calculated amount instead of 50% (as will be the case until 2024 or so) b. You think you will still be working in five year's time, so although the equipment will still be sold you estimate that the pool will not be wound down. c. You discuss easing your daughter into the business and setting up a small business with her in charge to service this contract. The company will then pay tax at 12.5%, instead of 25%, and she will use an 11% discount rate, since she is in a lower personal tax bracket. d. You estimate that on termination you can only recapture 50% of the net working capital instead of 100%

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