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.) WACC10.0%
Net equipment capital cost$65,000
Annual CCA deduction for equipment$21,665
Sales revenues, each year$150,000
Cash operating costs, each year$25,000
Tax rate35.0%

Question

Quizplus · Accepted Answer

The NPV calculation involves determining the initial investment, annual cash flows, and terminal cash flows, then discounting them at the WACC. The initial investment includes the opportunity cost of the building ($100,000) and the net equipment cost ($65,000), minus the tax shield from depreciation. The annual cash flows are calculated by subtracting operating costs and taxes from revenues, adding back depreciation. The terminal cash flow includes the recovery of working capital. The NPV is the sum of these discounted cash flows, which is closest to $54,672.

Easy Payment Loan Company Is Thinking of Opening a New