Question

Your company is considering a project which will require the purchase of $695,000 in new equipment....

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

Homework Answers

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
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