Question

Your company is considering a project which will require the purchase of $635,000 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 $224,000. Initial net working capital equal to 28.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 8.00% 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 $102,000. What is the project's NPV?

Answer 1

Present Value of Cash Outflow = Cost of Equipment + Working Capital

= 635000 + (28%*224000)

= 697,720

Present Value of Cash Inflow = PV of Operating Cash Inflows + PV of CCA Tax shields + PV of Salvage and W. Capital

= (Sales (1-Taxes))* PVAF (8%, 5 years) + 102,000 (Given) + (Salvage Value + Working Capital) * PVF @8%, 5th year

= 224,000 (1-0.35) * 3.99271003698 + 102,000 + (635000*25% + 224000* 28%) * 0.680583197

= 834,067.34  

NPV = Present Value of Cash Inflows - Present Value of Cash Outflow

= 834067.34 -  697,720

= 136347.34