A four-year project requires an initial investment of $165,000 in fixed assets plus $25,000 in net working capital. The project has after-tax costs of $14,501. The assets belong in a 20% CCA class and will have no salvage value. What is the project's equivalent annual cost if the required return is 14% and the firm's tax rate is 34%?

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) of a project is calculated to find the annual cost of owning and operating an asset over its entire lifespan. In this case, the initial investment includes both fixed assets ($165,000) and net working capital ($25,000), totaling $190,000. The after-tax costs of $14,501 are the operational costs associated with the project. The Capital Cost Allowance (CCA) at a 20% rate and the tax savings from depreciation need to be considered in the calculation. The required return is 14%, and the tax rate is 34%, which affects the project's cash flows and the calculation of the EAC. The correct answer, A) $63,998, is derived by calculating the present value of the project's costs (including initial investment, operational costs, tax savings from depreciation, and recovery of working capital at the end of the project) and then converting this present value into an equivalent annual cost using the given required return rate. This involves complex financial modeling that accounts for the depreciation, tax effects, and discounting of future cash flows.

A Four-Year Project Requires an Initial Investment of $165,000 in Fixed