Suppose a Five-Year Project Requires an Initial Capital Investment of $600,000

question 83

Multiple Choice

Suppose a five-year project requires an initial capital investment of $600,000 and an initial net working capital investment of $30,000.The project is expected to provide operating revenue of $400,000 per year.The associated operating costs are expected to be $175,000 per year.The capital asset belongs to Class 7 and has a CCA rate of 15%.The asset is expected to sell for $168,000 when the project terminates.Assume the asset class remains open after the project ends and that the half-year rule applies in the first year.The firm's marginal tax rate is 40% and cost of capital is 10%.What impact would it have on the project's NPV if the operating revenue falls by 5%?

• A)NPV decreases by 21.85%
• B)NPV decreases by 38.84%
• C)NPV decreases by 46.19%
• D)NPV decreases by 63.51%

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