Question

Your company is considering a project which will require the purchase of $755,000 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 $272,000. Initial net working capital equal to 34.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 11.00% 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 $126,000. What is the project's NPV?

Question 2 options:

	$96,380
	$98,851
	$101,322
	$103,793
	$106,265

Answer 1

Solution:

a)Initial cash outlay

=Cost of new equipment+Initial net working capital

=$755,000+($272,000*34%)

=$755,000+$92,480=$847,480

b)Present value of after tax annual sales

=Annual sales(1-tax rate)*PVAF@11% for 5 year

=$272,000*(1-0.35)*3.696

=$653,452.80

c)Present value of salvage value

=($755,000*25%)/(1+0.11)^5

=$188750*0.593451=$112013.94

d)Present value of recovery of net working capital

=$92,480*0.593451=$54,882.35

e)Calculation of NPV

=Present value of(after tax annual sales+salvage value+recovery of net working capital+CCA tax shield)-Initial cash outlay

=($653,452.80+$112013.94+$54,882.35+$126,000)-$847,480

=$98,869

Thus correct answer is $98,851

Difference between the calculated answer and NPV in option is due to rounding of present value factor.