Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net working capital investment of $25,000.The project is expected to provide operating revenue of $350,000 per year.The associated operating costs are expected to be $150,000 per year.The capital asset belongs to Class 8 and has a CCA rate of 20%.The asset is expected to sell for $36,000 when the project ends.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.The firm's marginal tax rate is 40% and cost of capital is 8%.What impact would it have on the project's NPV if the operating costs increase by 5%?

Question

Quizplus · Accepted Answer

The NPV decreases by 8.22% because the increase in operating costs reduces the project's cash flows, which in turn reduces the NPV.

Suppose a Seven-Year Project Requires an Initial Capital Investment of $475,000