Toronto Skaters is considering the purchase of a new computer system for $150,000.The asset has an economic life of four years, a CCA rate of 45%, and expected salvage value of $10,000.The project also requires an investment in net working capital of $7,500, which will be recovered at the end of the project.The project is expected to generate after-tax operating income of $80,000 per year.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.The firm's cost of capital is 18% and marginal tax rate is 40%.What is the NPV of the project?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $104,845.95. The NPV is calculated as follows:NPV = -Initial Investment + Present Value of After-Tax Operating Income + Present Value of Salvage ValueInitial Investment = $150,000 + $7,500 = $157,500Present Value of After-Tax Operating Income = $80,000 * (1 - 0.4) * (1 / 0.18) * (1 - (1 - 0.45)^4 / 0.18) = $272,222.22Present Value of Salvage Value = $10,000 * (1 - 0.4) * (1 / 0.18) * (1 - (1 - 0.45)^4 / 0.18) = $33,333.33NPV = -$157,500 + $272,222.22 + $33,333.33 = $104,845.95

Toronto Skaters Is Considering the Purchase of a New Computer