ABC, Inc. is considering a project that requires $21,000 in net working capital and $121,000 in fixed assets, which belong in a 30% CCA class. The fixed assets have a salvage value of 28,500 at the end of the 3 year project. The after-tax operating income of the project is $61,300 per year. The tax rate is 35% and the required rate of return is 16%. What is the NPV of this project?

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to consider the initial investment, the after-tax operating income, the tax shield from CCA, and the salvage value of the fixed assets. The initial investment is the sum of the net working capital and the fixed assets, which is $21,000 + $121,000 = $142,000. The after-tax operating income is given as $61,300 per year for 3 years. The tax shield from CCA can be calculated based on the 30% CCA rate on the fixed assets, and the salvage value at the end of the project needs to be considered as a cash inflow. Finally, these cash flows need to be discounted back to the present value using the 16% required rate of return. The correct NPV calculation, considering all these factors, results in an NPV of $48,933, making option C the correct choice.

ABC, Inc Is Considering a Project That Requires $21,000 in Net