HMS Corporation Is Considering an Expansion Project That Requires Investment

question 17

Essay

HMS Corporation is considering an expansion project that requires investment in capital assets of $545,000, costs of $15,000 to modify the assets before they can be put into operation, and additional raw materials inventory of $50,000 to support the project.In addition, HMS had spent $25,000 to study the viability of this project.The one-time after-tax opportunity costs associated with this project are $36,000.The project is expected to generate operating revenue of $600,000 per year, and the associated operating expenses are estimated at $275,000 per year.The capital assets belong to asset class 9, which has a CCA rate of 30%.The assets are expected to sell for $42,000 when the project terminates in eight years.Assume the asset class remains open after the project terminates and that the half-year rule applies in the first year.The firm's cost of capital is 14% and marginal tax rate is 40%.
a)What is the initial after-tax cash flow?
b)What is the present value of the CCA tax savings?
c)What is the present value of the after-tax operating cash flows?
d)What is the ending after-tax cash flow?
e)What is the NPV of the project?

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