Question

Your company is considering a project which will require the purchase of $695,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $248,000. Initial net working capital equal to 31.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 9.50% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. Assume the present value of the CCA tax shield is $114,000. What is the project's NPV?
Question 10 options: $114,274
$117,281
$120,288
$123,295
$126,303

Answer 1

1]	Annual sales	$       2,48,000
	Tax at 35%	$ 86,800
	Annual sales net of tax	$       1,61,200
2]	PV of annual sales net of tax = 161200*(1.095^5-1)/(0.095*1.095^5) =	$       6,18,961
	PV of DTS	$       1,14,000
	PV of salvage value = 695000*25%/1.095^5 =	$       1,10,371
	PV of released NWC = 248000*31%/1.095^5 =	$ 48,836
	PV of cash inflows	$       8,92,168
	Less: Initial investment = 695000+248000*31% =	$       7,71,880
	NPV	$       1,20,288