Question

Your company is considering a project which will require the purchase of $725,000 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 $260,000. Initial net working capital equal to 32.50% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 10.25% 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 $120,000. What is the project's NPV?

Answer 1

Tax rate		35%
Calculation of annual operating cash flow
		Year-1-5
Sale		$       260,000
Tax@35%	PBT*Tax rate	$         91,000
Profit After Tax (PAT)	PBT - Tax	$       169,000
Calculation of working capital movement
Annual sale		$       260,000
Working capital		32.50%
Working capital	=260000*32.5%	$         84,500
Calculation of selling price
Original cost		725,000
Selling price	=725000*25%	181,250
Calculation of NPV
						10.25%
Year	Tax shield on CCA	Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0	$               120,000	$     (725,000)	$       (84,500)		$     (689,500)	1.0000	$     (689,500)
1				$       169,000	$       169,000	0.9070	$       153,288
2				$       169,000	$       169,000	0.8227	$       139,037
3				$       169,000	$       169,000	0.7462	$       126,110
4				$       169,000	$       169,000	0.6768	$       114,386
5		$       181,250	$        84,500	$       169,000	$       434,750	0.6139	$       266,899
					Net Present Value	$       110,220