An engineering project involves the purchase of a capital asset with first cost of $100 000,...

An engineering project involves the purchase of a capital asset with first cost of $100 000, operating costs of $5 000 per year and a service life of 10 years. The expected revenue is $20 000 per year. If the CCA rate is 25%, interest rate is 10% and the corporate tax rate is 33%, what is the project's present worth?

Expert Solution

The PW of the capital costs is:

PW = CTF * 100,000
= (1 – (0.33*0.25*(1+0.1/2))/((0.1+0.25)*(1+0.1))) * 100,000
= 0.755 * 100,000
= $75,500

Present Worth of the project:

PW = 20,000(P/A,10%,10)*(1-0.33) - 77,500 - 5,000(P/A,10%,10)*(1-0.33)
= 20,000 * 6.1445 * 0.67 - 77,500 - 5,000 * 6.1445 *0.67
= 82,337 - 75,500 - 20,584
= -$13,747

So,it’s not a good project.

Rahul Sunny answered 2 years ago

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