Suppose a six-year project requires an initial capital investment of $425,000 and an initial net working capital investment of $50,000.The project is expected to provide operating revenue of $270,000 per year.The associated operating costs are expected to be $130,000 per year.The capital asset belongs to Class 9 and has a CCA rate of 30%.The asset is expected to sell for $40,000 when the project terminates.Assume the asset class remains open when the asset is sold and the accelerated investment incentive is applicable for CCA in year 1.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 cost of capital were 10%?

Question

Quizplus · Accepted Answer

The NPV of a project is inversely related to the cost of capital. Therefore, if the cost of capital increases, the NPV will decrease. In this case, the cost of capital increases from 8% to 10%, so the NPV will decrease.

Suppose a Six-Year Project Requires an Initial Capital Investment of $425,000