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?

	$108,036
	$110,879
	$113,722
	$116,566
	$119,409

Answer 1

Annual sales	$           256,000
PV of after tax annual sales = 256000*(1-35%)*(1.1^5-1)/(0.1*1.1^5) =	$           630,787
PV of terminal non-operating cash inflows = (715000*25%+256000*32%)/1.1^5 =	$           161,856
PV of depreciation tax shield [given]	$           118,000
PV of cash inflows	$           910,642
Less: Initial investment [715000+256000*32%) =	$           796,920
NPV	$           113,722