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