Question

Your company is considering a project which will require the purchase of \$745,000 in new equipment....

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?

 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