Amazing Lace has an opportunity to invest in a ten-year project that requires an initial investment of $2 million in a capital asset with a CCA rate of 20%.The initial net working capital requirement is $200,000, which will remain unchanged throughout the life of the project.The capital asset is expected to sell for $75,000 when the project terminates.Assume the asset class is closed upon termination of the project.The firm's cost of capital is 10.5% and marginal tax rate is 40%.What is the ending after-tax cash flow (ECF)assuming half-year rule is applicable for CCA in year 1?

Question

Quizplus · Accepted Answer

The ending after-tax cash flow (ECF) can be calculated by considering the salvage value of the asset, the recaptured depreciation, and the tax effects. Since the asset is sold for $75,000 at the end of the project, and assuming the half-year rule for CCA (Capital Cost Allowance) in the first year, the asset's undepreciated capital cost (UCC) will be calculated over the project's life. The recapture of depreciation (if any) and any terminal loss will affect the taxable income, thereby influencing the after-tax salvage value. The initial net working capital is also recovered at the end of the project. The correct calculation involves determining the asset's UCC at the end of the project, calculating the recapture or terminal loss, and then adjusting for taxes and the recovery of net working capital to find the ECF.

Amazing Lace Has an Opportunity to Invest in a Ten-Year