Monteregie Auto Services is considering an opportunity to invest $550,000 in a capital asset that will generate additional after-tax operating income of $200,000 per year.The asset has a six-year life,a CCA rate of 20 percent,and an expected salvage value of $60,000.The project has a beta of 1.5.The company's cost of capital is 12 percent and marginal tax rate is 35 percent.The risk-free rate is 4.5 percent and the market risk premium is 6 percent.What is the present value of the after-tax operating cash flows?

Question

Quizplus · Accepted Answer

The project's discount rate = 4.5% + 1.5*(6%)= 13.5%
PV(CFAT)= $200,000*PVAF(13.5%,6)= $788,500.91

Monteregie Auto Services Is Considering an Opportunity to Invest $550,000