Majestic Theaters is considering investing in some new projection equipment whose data are shown below. The required equipment has a 7-year project life falling into a CCA class of 30%, but it would have a positive pre-tax salvage value at the end of Year 7. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 7-year life. What is the project's NPV? WACC12.0%
Net capital investment in fixed assets$950,000
Required new working capital$30,000
Sales revenues, each year$580,000
Cash operating costs, each year$330,000
Expected pretax salvage value$50,000
Tax rate35.0%
A) $13,965
B) $15,226
C) $16,910
D) $17,882

Question

Quizplus · Accepted Answer

The project's NPV is calculated by considering the initial investment, annual net cash flows, tax effects, and the salvage value. After calculating the annual after-tax cash flows, including the tax shield from CCA, and discounting them at the WACC of 12%, the NPV is found to be $16,910.

Majestic Theaters Is Considering Investing in Some New Projection Equipment