Suppose a new machine costs $100,000 and will provide nominal operating income of $50,000 in each of the next four years.The machine belongs to asset class 9, which has a CCA rate of 30%.The machine is expected to be sold for $25,000 at the end of four years.The real discount rate has been estimated to be 8% per year.Expected inflation is 2.5% over the next four years.The firm's marginal tax rate is 38%.Assume there are other assets in the asset class when the machine is sold and that the half-year rule applies in year one.What is the NPV of the project?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $35,435.82. The NPV is calculated by taking the present value of the future cash flows and subtracting the initial investment. The future cash flows are calculated by taking the nominal operating income and subtracting the depreciation expense. The depreciation expense is calculated by taking the CCA rate and multiplying it by the undepreciated capital cost. The undepreciated capital cost is the original cost of the machine minus the accumulated depreciation. The present value of the future cash flows is calculated by discounting them back to the present at the real discount rate. The real discount rate is the nominal discount rate minus the expected inflation rate.

Suppose a New Machine Costs $100,000 and Will Provide Nominal