Question

	r=	8%		Summary
	Tax Rate	30%			Initial Investment
					PV of Cash Flows After Tax
	Equipment cost				PV of CCA Tax Shield
	Setup and training				PV of Ending Cash Flows		Decision:
	Investment in NWC				NPV
	A.  Initial Investment				Proceed with Project?
	Yr	1	2	3	4	5
	Sales
	Less forgone rental Income
	Costs
	Project cash flows before tax
	Tax
	Project cash flows after tax
	B. PV of Cash Flows After Tax
	C.  PV of CCA tax shield formula				Salvage value
	(if asset class remains open after asset is sold)				Return of NW C
					Total ending cashflow
					D. PV of ending cash flows
	C = Capital Cost	$680,000
	d = CCA rate for asset class	30%
	T = Corporate tax rate	30%
	r = cost of capital rate	8%
	S = Salvage value of  asset	$97,500
	n=# years	5
	C. PV of CCA Tax Shield	139,372

Never-Wet Outdoor Suppliesis looking to expand its business. The new business is expected to generate $2.7 million per year in  sales over the next 5 years. Annual costs would increase by $2.2 million. An investment in working capital of $70,000 would have to be made initially. The machinery (CCA rate of 30%) would cost $650,000, with additional costs of $30,000 to be incurred for setup and training. They also estimate that it would be possible to sell the equipment for 15% of its initial value at the end of 5 years. The company would set up operations in a building it does not use but currently rents out for $80,000 per year. If the firm's cost of capital is 8% and its tax rate is 30%, should it proceed with this new business?

Answer 1

r=	8%		Summary
Tax Rate	30%			Initial Investment	-0.75
				PV of Cash Flows After Tax	$1.17
Equipment cost	650000			PV of CCA Tax Shield	0.139372
Setup and training	30000			PV of Ending Cash Flows	0.09027778	Decision:	Proceed with the business because the NPV is positive
Investment in NWC	70000			NPV	0.65350653
A.  Initial Investment	750000			Proceed with Project?	Yes
Yr	1	2	3	4	5
Sales	2.7	2.7	2.7	2.7	2.7
Less forgone rental Income	-0.08	-0.08	-0.08	-0.08	-0.08
Costs	-2.2	-2.2	-2.2	-2.2	-2.2
Project cash flows before tax	0.42	0.42	0.42	0.42	0.42
Tax	0.126	0.126	0.126	0.126	0.126
Project cash flows after tax	0.294	0.294	0.294	0.294	0.294
B. PV of Cash Flows After Tax	$1.17
C.  PV of CCA tax shield formula				Salvage value	97500
(if asset class remains open after asset is sold)				Return of NW C	0
				Total ending cashflow	97500
				D. PV of ending cash flows	90,277.78
C = Capital Cost	$680,000
d = CCA rate for asset class	30%
T = Corporate tax rate	30%
r = cost of capital rate	8%
S = Salvage value of  asset	$97,500
n=# years	5
C. PV of CCA Tax Shield	139,372