Queue de Castor Foods is considering the purchase of a new capital asset for $35,000.The asset has an economic life of three years, a CCA rate of 20%, and expected salvage value of $5,000.The project also requires an investment in net working capital of $4,500.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 14% and marginal tax rate is 40%.What is the present value of the terminal after-tax cash flow (ECF_n)?

Question

Quizplus · Accepted Answer

The terminal after-tax cash flow (ECFS) can be calculated by considering the salvage value, the recapture of CCA (Capital Cost Allowance), and the recovery of net working capital, adjusted for taxes. The salvage value is $5,000. Since the asset class remains open, there is no tax implication from the sale of the asset itself. The net working capital of $4,500 is fully recovered at the end of the project. Therefore, the terminal cash flow before taxes is $5,000 (salvage) + $4,500 (NWC) = $9,500. Since there are no taxes due on the sale (because the asset class remains open and there's no recapture of CCA to be taxed), the entire amount is considered the after-tax terminal cash flow. Discounting this at the firm's cost of capital of 14% for three years gives the present value: PV = $9,500 / (1 + 0.14)^3 = $6,412.23.

Queue De Castor Foods Is Considering the Purchase of a New