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A Firm Is Considering a Project That Requires an Initial

question 43

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 percent.An initial investment in raw materials inventory of $50,000 is also required to support the project,which will rise to 15 percent of sales.The project will generate sales revenue of $400,000 in the first year,which will grow at 4 percent per year.Variable costs will be $220,000 for the first year,which will grow at 6 percent 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 percent and required return is 12.5 percent.Assume the asset class remains open after the project terminates.
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?

Definitions:

Unemployment Insurance

A government-managed program that provides financial assistance to individuals who have lost their jobs through no fault of their own, to support them while they search for new employment.

Well-being

A comprehensive term for the condition of an individual or group, encompassing physical, psychological, and social aspects.

Unemployment Insurance

A government program that provides financial assistance to individuals who have lost their jobs through no fault of their own.

Minimum-Wage Law

Legislation that sets the lowest hourly wage rate that an employer can legally pay its workers.