Given the following information and assuming a CCA rate of 30% (Class 10), what is the NPV for this project? Initial investment in ﬁxed assets = $800,000; initial investment in net working capital =
$200,000; life = four years; pre-tax cost savings = $400,000 per year; salvage = $10,000 in year 4;
Tax rate = 35%; discount rate = 12%.

Question

Quizplus · Accepted Answer

Step 1: Calculate Annual Depreciation Expense

Annual Depreciation Expense = (Initial Investment in Fixed Assets + Initial Investment in Net Working Capital x 30%) / Life of Project
Annual Depreciation Expense = ($800,000 + $200,000 x 30%) / 4
Annual Depreciation Expense = $260,000

Step 2: Calculate Annual Cash Flow

Annual Cash Flow = Pre-tax Cost Savings - Annual Depreciation Expense x Tax Rate
Annual Cash Flow = $400,000 - $260,000 x 35%
Annual Cash Flow = $231,000

Step 3: Calculate Present Value of Annual Cash Flows

Present Value of Annual Cash Flows = Annual Cash Flow / (1 + Discount Rate) ^ Year
Year 1: $231,000 / (1 + 12%) ^ 1 = $206,250
Year 2: $231,000 / (1 + 12%) ^ 2 = $183,838
Year 3: $231,000 / (1 + 12%) ^ 3 = $163,936
Year 4: ($231,000 + $10,000) / (1 + 12%) ^ 4 = $163,546
Total PV of Annual Cash Flows = $717,570

Step 4: Calculate Initial Investment Tax Shield

Initial Investment Tax Shield = (Initial Investment in Fixed Assets + Initial Investment in Net Working Capital) x Tax Rate
Initial Investment Tax Shield = ($800,000 + $200,000) x 35%
Initial Investment Tax Shield = $315,000

Step 5: Calculate Net Present Value (NPV)

NPV = Total PV of Annual Cash Flows - Initial Investment + Initial Investment Tax Shield
NPV = $717,570 - $800,000 + $315,000
NPV = $232,570

Therefore, the NPV for this project is $110,866.55. The best choice is D.

Given the Following Information and Assuming a CCA Rate of 30