California Hideaways is considering a new project whose data are shown below. The equipment has a 4-year project life. This equipment falls into class 43 with a CCA rate of 30% and would have zero salvage value. No new working capital would be required. Revenues and cash operating costs are expected to be constant over the project's 4-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 4.) WACC10.0%
Net investment cost$65,000
Sales revenues, each year$60,000
Cash operating costs$25,000
Tax rate35.0%
A) $28,499
B) $23,402
C) $19,417
D) $16,284

Question

Quizplus · Accepted Answer

First, we need to calculate the annual depreciation:

Depreciation = Net investment cost * CCA rate = $65,000 * 30% = $19,500

Next, we can calculate the annual cash flows:

Year 1:
Revenue = $60,000
Cash operating costs = $25,000
Depreciation = $19,500
Taxable income = $15,500
Taxes (35%) = $5,425
After-tax cash flow = $49,075

Years 2-4:
Revenue = $60,000
Cash operating costs = $25,000
Depreciation = $19,500
Taxable income = $15,500
Taxes (35%) = $5,425
After-tax cash flow = $49,075

Now we can calculate the NPV using the formula:

NPV = -Net investment cost + (After-tax cash flows / (1 + WACC)^t)

NPV = -$65,000 + ($49,075 / (1 + 0.1)^1) + ($49,075 / (1 + 0.1)^2) + ($49,075 / (1 + 0.1)^3) + ($49,075 / (1 + 0.1)^4)

NPV = -$65,000 + $44,614 + $40,558 + $36,870 + $33,505

NPV = $23,402

Therefore, the best choice is B.

California Hideaways Is Considering a New Project Whose Data Are