HMS Corporation Is Considering an Expansion Project That Requires Investment

question 92

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 assuming accelerated investment incentive is applicable for CCA in year 1.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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Definitions:

Vital Energy

A concept in various philosophies and medicines that considers the force or energy as a vital principle essential for the existence of life.

Traditional Chinese Medicine

An ancient healthcare system from China involving techniques like acupuncture, herbal remedies, and cupping therapy to balance the body's chi.

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Medical practices and treatments provided to animals by veterinarians, including preventative care, diagnosis, and surgery.

Human Health Care

A service system devoted to the maintenance and improvement of physical and mental health in humans through the provision of medical services.