A firm is considering a project that requires an initial cash outflow of $1,000,000 for the purchase of a capital asset, which has an eight-year life and a CCA rate of 20%, with the asset class remaining open and the half-year rule applying in the first year.The expected salvage value of the asset is $75,000 at the end of eight years.The project will generate sales revenue of $450,000 in the first year, which will grow at 5% per year in the subsequent years.Variable costs will be $200,000 for the first year, which will also grow at 5% per year.The firm's marginal tax rate is 40% and required return is 12%.What is the project's NPV?

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Quizplus · Accepted Answer

The correct answer is A. The project's NPV is $123,498.The project's cash flows are as follows:Year 0: -$1,000,000Year 1: $250,000Year 2: $262,500Year 3: $275,625Year 4: $289,406Year 5: $303,852Year 6: $319,035Year 7: $334,965Year 8: $351,694The project's NPV is calculated as follows:NPV = -Initial investment + Sum of present values of future cash flowsNPV = -$1,000,000 + $250,000/(1+0.12)^1 + $262,500/(1+0.12)^2 + $275,625/(1+0.12)^3 + $289,406/(1+0.12)^4 + $303,852/(1+0.12)^5 + $319,035/(1+0.12)^6 + $334,965/(1+0.12)^7 + $351,694/(1+0.12)^8NPV = $123,498

A Firm Is Considering a Project That Requires an Initial