Canadian Auto Shop Services has an opportunity to invest $550,000 in a new project that will generate additional operating profit of $200,000 per year.The asset has a six-year life,a CCA rate of 30 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.Assume the asset class remains open after the asset is sold.What is the project's NPV?

Question

Quizplus · Accepted Answer

Determine the appropriate discount rate for the project using the project beta. = 4.5% + 1.5*6% = 13.5% CF₀ = $550,000; PV(CFAT)= $200,000*(1 - 35%)*PVAF(13.5%,6)= $512,525.59 11ea8229_3476_008a_bbd8_f97a467d6d8d_TB1726_00 11ea8229_3476_008b_bbd8_7d9756c48cdc_TB1726_00 NPV = -$550,000 + $512,525.59 + $118,088.80 + $28,065.71 = $108,680.10

Canadian Auto Shop Services Has an Opportunity to Invest $550,000