Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net working capital investment of $25,000.The project is expected to provide operating revenue of $350,000 per year.The associated operating costs are expected to be $150,000 per year.The capital asset belongs to Class 8 and has a CCA rate of 20 percent.The asset is expected to sell for $36,000 when the project ends.Assume the asset class remains open after the asset is sold.The firm's marginal tax rate is 40 percent and cost of capital is 8 percent.What impact would it have on the project's NPV if the operating costs increase by 5 percent?

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CF₀ = $475,000 + $25,000 = $500,000 11ea8229_3477_873b_bbd8_b7ca5767e442_TB1726_00 11ea8229_3477_873c_bbd8_8362427da449_TB1726_00 PV(CFAT,Cost=$150,000)= $(350,000 - 150,000)*(1 - 40%)*PVAF(8%,7) = $624,764.41 PV(CFAT,Cost=$157,500)= $(350,000 - 157,500)*(1 - 40%)*PVAF(8%,7) = $601,335.74 NPV (Cost=$150,000)= -$500,000+ $124,686.22 + $35,592.91 + $624,764.41 = $285,043.54 NPV (Cost=$157,500)= -$500,000+ $124,686.22 + $35,592.91 + $601,335.74 = $261,614.87 % Change in NPV = 11ea8229_3477_ae4d_bbd8_a9909d9d41b0_TB1726_11

Suppose a Seven-Year Project Requires an Initial Capital Investment of $475,000