Question

Your company is considering a project which will require the purchase of $775,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $280,000. Initial net working capital equal to 35.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 11.50% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. Assume the present value of the CCA tax shield is $130,000. What is the project's NPV?

Answer 1

Tax rate		35%
Calculation of annual operating cash flow
		Year-1-5
Sale		$       280,000
Tax@35%	PBT*Tax rate	$         98,000
Profit After Tax (PAT)	PBT - Tax	$       182,000
Calculation of working capital movement
Annual sale		$       280,000
Working capital		35.00%
Working capital	=280000*35%	$         98,000
Calculation of selling price
Original cost		775,000
Selling price	=775000*25%	193,750
Calculation of NPV
						11.50%
Year	Tax shield on CCA	Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0	$               130,000	$     (775,000)	$       (98,000)		$     (743,000)	1.0000	$     (743,000)
1				$       182,000	$       182,000	0.8969	$       163,229
2				$       182,000	$       182,000	0.8044	$       146,393
3				$       182,000	$       182,000	0.7214	$       131,295
4				$       182,000	$       182,000	0.6470	$       117,753
5		$       193,750	$        98,000	$       182,000	$       473,750	0.5803	$       274,900
					Net Present Value	$         90,570