Question

Your company is considering a project which will require the
purchase of $745,000 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 $268,000. Initial net working
capital equal to 33.50% of sales will be required. All of the net
working capital will be recovered at the end of the project. The
firm requires a 10.75% 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 $124,000. What is the project's NPV?

Answer #1

Given: | |

Cost of equipment | 745000 |

sales | 268000 |

Net working capital = 33.5% of sales | 89780 |

rate of return | 10.75% |

tax | 35% |

time | 5 years |

Cash outflow = -745000-89780 = -$834780

Cash inflow every year = 268000 * (1-0.35) = $174200

cash flow last year = 174200+89780+(0.25*745000) = $450230

Year | Cash flows |

0 | -834780 |

1 | 174200 |

2 | 174200 |

3 | 174200 |

4 | 174200 |

5 | 450230 |

NPV = | ($19,158.10) |

PV of Tax shield | $124,000.00 |

Final NPV of the project = NPV + PV of tax
shield |
$104,841.90 |

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