Question
In: Finance
The marketing department has proposed selling your company's product line in a new export market. Production...
The marketing department has proposed selling your company's product line in a new export market. Production equipment (Class 43) with a CCA rate of 30% costing $100,000 will be needed, as will installation and training estimated at $10,000 each. These costs will all occur at time 0. Project cash flows before tax are forecast to be $40,000 per year over the 4-year project life. An initial investment in net working capital of $4,000 will be needed, and each year net working capital will increase by $2,000. The equipment will likely be obsolete at the end of the 4 years, so no salvage value is forecast. The company's tax rate is 25%, and its cost of capital is 11%.
1. Should the company sell into the new market?
2. What is the project's NPV if the equipment had a salvage value of $20,000?
3. Assuming no salvage value, what is the NPV if the CCA rate is 10%?
Solutions
Expert Solution
1. At the discount rate of 11%, the NPV is negative and hence, the project should not be accepted.
2) Project's NPV in the equipment had a salvage value of $20,000
3) The project's NPV at a CCA rate of 10% and no salvage value:
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