Question

What is the NPV of a project that costs $200,000, provides $43,000 in after-tax cash flows (excluding the CCA tax shield) annually for six years , requires a $5,000 increase in net working capital, and depreciates the asset at 15 percent declining balance over six years and sold at zero salvage value? The discount rate is 14 percent. The tax rate is 40 percent.(Assume the half-year rule applies and working capital is recovered at the end of the project)

Select one:

a. $12,868

b. $3,329

c. $11,283

d. $6,051

e. -$30,065

Answer 1

Correct Option A i.e $12868
Calculation of NPV
Year	Total cash flow	pv Factor @14%	Presnet value
0	(205,000)	1	(205,000)
1	55,000	0.878	48,290
2	53,200	0.77	40,964
3	51,670	0.675	34,877
4	50,370	0.593	29,869
5	49,264	0.52	25,617
6	83,496	0.458	38,241
Net present value		12,868
Note 1: Calculation of Annual Cash Flow
Year	Cash Flow	Depreciation	Tax sheild on depreciation	Tax sheild on disposal of asset	Working capital	Total cash flow
0	-200000				-5000	(205,000)
1	43000	30,000	12,000			55,000
2	43000	25,500	10,200			53,200
3	43000	21,675	8,670			51,670
4	43000	18,424	7,370			50,370
5	43000	15,660	6,264			49,264
6	43000	13,311	5,324	30,172	5000	83,496
Note 2: CALCULATION OF DEPRECIATION
Year	Cost	Depreciation	Declining balance
0	200000	0	200,000
1	200000	30,000	170,000
2	170000	25,500	144,500
3	144500	21,675	122,825
4	122825	18,424	104,401
5	104401.25	15,660	88,741
6	88741.063	13,311	75,430