The project costs $2.1 million and has a five-year service life. The retooling p
ID: 2750388 • Letter: T
Question
The project costs $2.1 million and has a five-year service life. The retooling project has a CCA rate of 30 %. At the end of the fifth year, any assets held for the project will he sold.The pected salvage value will be about 10% of the initial project cost. The firm will finance 40% of the project money from an outside finance situation at an interest rate of 10%. The firm is required to repay the loan with five equal annual payments. The firm's incremental (marginal) tax rate on the investment is 35% The firm's MARR is 18%. With the preceding financial information. Determine the after-tax cash flows. Compute the annual equivalent worth for this project.Explanation / Answer
(a) Computation of after tax cash flows
(b) Computation of annual equivalent worth of this project
P.V of cash flows = 2100 x 0.8475 + 56330 x 0.7182 + 92715 x 0.6086 + 114208 x 0.5158 + (84022) x 0.4371
= 120844.78
Annual equivalent worth of the project = 120844.7752/3.1272
= 38643.12
Working Notes:
Amount of loan taken = $2100000 x 40%
= $840000
Statement showing loan repayment and interest
Calculation of Capital cost allowance
1 2 3 4 5 Interest 84000 67200 50400 33600 16800 Depreciation 630000 441000 308700 216090 151263 Total 714000 508200 359100 249690 168063 Tax sheild @35% 249900 177870 125685 87392 58822 Repayment of principal 168000 168000 168000 168000 168000 Interest 84000 67200 50400 33600 16800 Less: Tax savings 249900 178870 125685 87392 58822 Less : Salvage value 210000 Net cash flows after tax 2100 56330 92715 114208 (84022)Related Questions
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