A Firm Is Considering a Project That Requires an Initial

question 89

Essay

A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30%.An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15% of sales.The project will generate sales revenue of $400,000 in the first year, which will grow at 4% per year.Variable costs will be $220,000 for the first year, which will grow at 6% per year.The project's fixed costs are $40,000 per year.The expected salvage value of the asset is $45,000 at the end of five years.The firm's marginal tax rate is 40% and required return is 12.5%.Assume the asset class remains open after the project terminates and the half-year rule will apply in the first year.
a)What is the present value of the CCA tax savings?
b)What is the present value of the after-tax operating cash flow?
c)What is the present value of the change in net working capital?
d)What is the NPV of the project?

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Definitions:

First Nations

refers to indigenous peoples in Canada who are not Inuit or Métis, often recognized as the original inhabitants of the land.

Hispanic

A term used to describe people, cultures, or countries related to the Spanish language, Hispanic America, Spain, and Spanish heritage or origin.

African American

African American pertains to individuals in the United States who have African ancestry, with cultural, historical, and social distinctions.

Static Time

A concept of time considered unchanging, fixed, and unmoving, often contrasted with dynamic or real-time environments.