Question

Your company is considering a project which will require the purchase of $795,000 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 $288,000. Initial net working capital equal to 36.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 12.00% 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 $134,000. What is the project's NPV?

	$73,567
	$75,610
	$77,654
	$79,697
	$81,741

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Answer 1

1]	Annual sales	$       2,88,000
	Tax at 35%	$       1,00,800
	Annual sales net of tax	$       1,87,200
2]	PV of annual sales net of tax = 187200*(1.12^5-1)/(0.12*1.12^5) =	$       6,74,814
	PV of DTS	$       1,34,000
	PV of salvage value = 795000*25%/1.12^5 =	$       1,12,776
	PV of released NWC = 288000*36%/1.12^5 =	$ 58,831
	PV of cash inflows	$       9,80,421
	Less: Initial investment = 795000+288000*36% =	$       8,98,680
	NPV	$ 81,741