The machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and will require a net working capital investment of $5,000 up-front. The project generates after-tax
Operating income of $11,501. The ﬁxed assets will be sold for $2,000 at the end of the project. If the
ﬁrm has a tax rate of 34% and a required return of 10%, what is the project NPV?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to first calculate the cash flows.
Initial Investment: -$20,000 - $5,000 (net working capital) = -$25,000
Annual Operating income: $11,501
Annual Depreciation: 15% of $20,000 = $3,000
Taxable income: $11,501 - $3,000 = $8,501
Taxes at 34%: $2,890.34
After-Tax Operating Cash Flow: $11,501 - $2,890.34 = $8,610.66

Year 0: -$25,000
Year 1: $8,610.66
Year 2: $8,610.66
Year 3: $8,610.66 + $2,000 (salvage value) = $10,610.66

Using a financial calculator or Excel, we can calculate the NPV to be $12,446, which is greater than zero and therefore a profitable investment. Therefore, the best choice is C.

The Machinery Required for a Three Year Project Costs $20,000