Question

Your company is considering a project which will require the purchase of $715,000 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 $256,000. Initial net working capital equal to 32.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 10.00% 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 $118,000. What is the project's NPV?
options: $108,036
$110,879
$113,722
$116,566
$119,409

Answer 1

Statement showing NPV

Particulars	0	1	2	3	4	5	Total
Purchase of new equipment	-715000
Working capital required (256000 x 32%)	-81920
Annual sales		256000	256000	256000	256000	256000
Tax @ 35%		89600	89600	89600	89600	89600
PAT/Cash flow		166400	166400	166400	166400	166400
Salvage value of equipment (715000x 25%)						178750
WC released						81920
Total cash flow	-796920	166400	166400	166400	166400	427070
PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
PV	-796920	151273	137521	125019	113653	265177	-4278
Add : present value of the CCA tax shield							118000
NPV							113722

Thus NPV =$ 113722