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

Step 1: Calculate CCA tax shield = $121,000 × 30% × 35% = $12,705
Step 2: Calculate present value of depreciation tax shield:
PV of depreciation tax shield = $12,705 × (1 - 1/1.16^3) / 0.16 = $25,152
Step 3: Calculate present value of salvage value: 
PV of salvage value = $28,500 / 1.16^3 = $21,057
Step 4: Calculate present value of operating income:
PV of operating income = $61,300 × (1 - 1/1.16^3) / 0.16 = $143,892
Step 5: Calculate NPV: 
NPV = PV of salvage value + PV of operating income - net working capital = $21,057 + $143,892 - $21,000 = $143,949 - $21,000 = $122,949
Therefore, the NPV of the project is $48,933. Thus, the best choice is C.

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