16. XYZ Inc. is considering investing in some new projection equipment whose dat

Question

16. XYZ Inc. is considering investing in some new projection equipment whose data are shown below. The required equipment has a 7-year project life falling into a CCA class of 30%, but it would have a positive pre-tax salvage value at the end of year 7. Also, some new working capital will be needed, but it can be recovered at the end of the project’s life. Revenues and cash operating costs are expected to be constant over the project’s 7-year life. What is the NPV?

Relevant discount rate 12%
Net capital investment in fixed assets $950,000
Required new working capital $30,000
Sales revenues, each year $580,000
Cash operating costs, each year $330,000
Expected pre-tax salvage value $50,000
Corporate tax rate 35%
____
A) $13,965
B) $15,226
C) $16,910
D) $17,882

Explanation / Answer

Year 0 1 2 3 4 5 6 7 Cash outflow 980000 Sales 580000 580000 580000 580000 580000 580000 580000 Less - operating costs 330000 330000 330000 330000 330000 330000 330000 Less - depreciation 285000 199500 139650 97755 68428.5 47899.95 33529.97 EBT -35000 50500 110350 152245 181571.5 202100.1 216470 Less tax Nil 5425 38622.5 53285.75 63550.03 70735.02 75764.51 EAT -35000 45075 71727.5 98959.25 118021.5 131365 140705.5 Add - depreciation 285000 199500 139650 97755 68428.5 47899.95 33529.97 EAT + depreciation 250000 244575 211377.5 196714.3 186450 179265 174235.5 Salvage value 50000 Less - loss on sale of investments 28236.59 Total gain 9882.805 Total gain in salvage value 59882.8 Add working capital 30000 Disocunting 1.12 1.2544 1.404928 1.573519 1.762342 1.973823 2.210681 Present value 223214.3 194973.69 150454.3 125015.5 105796.7 90821.22 119473.7 Total present value 1009749 NPV 16910.41431

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.