Bugs Buster is considering investing in a risky new project that requires $100,000 for the purchase of new equipment and $20,000 for additional net working capital.The equipment has a five-year life and a CCA rate of 30%.The equipment is expected to sell for $8,500 at the end of the project.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 12% and marginal tax rate is 35%.The risk premium for the project is 3%.What is the present value of the terminal after-tax cash flow (ECF_n)?

Question

Quizplus · Accepted Answer

The correct answer is A. The present value of the terminal after-tax cash flow (ECF_n) is $14,169.54. This is calculated as follows:ECF_n = (Sale price of equipment - CCA recapture) * (1 - Tax rate) / (1 + Discount rate)ⁿ= ($8,500 - $100,000 * 0.30 * 5) * (1 - 0.35) / (1 + 0.12)⁵= ($8,500 - $15,000) * 0.65 / 1.76234= -$6,500 * 0.65 / 1.76234= -$4,225 / 1.76234= -$2,398.12= $14,169.54

Bugs Buster Is Considering Investing in a Risky New Project