Champlain Transportation Inc.is considering a six-year project that requires $800,000 for the purchase of a capital asset with a CCA rate of 30%.The project is expected to generate sales revenue of $600,000 per year.The project's variable and fixed costs are estimated at $240,000 and $50,000 per year, respectively.The firm's marginal tax rate is 35% and cost of capital is 12%.Ignoring CCA, what is the present value of the after-tax operating cash flows?

Question

Quizplus · Accepted Answer

The present value of the after-tax operating cash flows is $828,449. This is calculated as follows:PV = -Initial investment + (Annual after-tax operating cash flows / Discount rate)PV = -$800,000 + (($600,000 - $240,000 - $50,000) * (1 - 0.35) / 0.12)PV = -$800,000 + $238,000 / 0.12PV = -$800,000 + $1,983,333PV = $1,183,333