Easy Payment Loan Company is thinking of opening a new office,and the key data are shown below.Easy Payment owns the building,free and clear,and it would sell it for $100,000 after taxes if the company decides not to open the new office.The equipment that would be used would be depreciated by the straight-line method over the project's 3-year life,and would have a zero salvage value.An extra $5,000 of new working capital would be required to get this project running.Revenues and cash operating costs would be constant over the project's 3-year life.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3 and the increased working capital will be recovered when this project ends.A simplified CCA is for mathematical convenience.) $\begin{array}{lr}
\text { WACC } & 10.0 \% \
\text { Net equipment capital cost } & \$ 65,000 \
\text { Annul CCA deduction for equipment } & \$ 21,665 \
\text { Sales revenues, each year } & \$ 150,000 \
\text { Cash operating costs, each year } & \$ 25,000 \
\text { Tax rate } & 3.5 \%
\end{array}$ 10.0%

Question

Quizplus · Accepted Answer

The NPV calculation involves determining the net cash flows over the project's life, including the initial investment, operating cash flows, tax impacts, and the recovery of working capital. The building's opportunity cost ($100,000) is considered as an initial outflow. The annual cash flow is calculated by subtracting operating costs and taxes from revenues, adding back depreciation (non-cash expense), and discounting these cash flows at the WACC of 10%. The working capital is recovered at the end of the project. The NPV is the sum of these discounted cash flows.

Easy Payment Loan Company Is Thinking of Opening a New