During the lost two years. Cooper Inc. incurred o cost of $65 000 for Conducting

Question

During the lost two years. Cooper Inc. incurred o cost of $65 000 for Conducting a feasibility study on a new project The project requires purchasing a new machine that will cost $1.050.000 plus an additional $50 000 in installation costs. Management estimates that the firm will obtain annual operating revenues before taxes of $430,000.and incur annual operating expenses before taxes of $130.000 over the economic life of the project. The specifications of this machine indicate an economic life of ten years and management estimates that at the end of the economic life, the machine will have a salvoes value of $150,000. This machine is in asset class 8 which has n CCA rote of 20%. The asset class is expected to remain open at the end of the project. Finally, management expects to make an initial investment working capital of $300,000. which will be recovered at the end of the economic life of the project. Based on NPV analysis, should the project be undertaken? Assume this project will have the same level of risk as the firm .

Explanation / Answer

Initial investments = $1050000 + 50000 + 300000 = $1,400,000

Depreciation for 5 years = (1050000 - 150000) * 20% = $180000

Annual Cash flow = (430000 - 130000) = $300000

Present value of future cash flow upto 5th year = $300000 * PVIFA(20%,10years) = 300000 * 4.193 = $1257900

Net Present value of the project = [$1257900 +(300000 * 0.162) ] - $1,400,000 = (-) $93500

As the NPV is negative, so the project should not be undertaken.

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