A Company is considering investing 1.5 million for equipment for a new project.

Question

A Company is considering investing 1.5 million for equipment for a new project. With additional installation costs of 30,000 and will require 50,000 in fixtures that were capitalized. The new project will be located in a unused building owned by the company that they had rented out for 60,000 a year previously. The icremental operating income for the project is expected to be 455,000 for the first 4 years and 475,000 for the next 3 years. After 7 years the equipment will be sold for 155,000. The CCA rate on fixtures and equipment is 30%. The companys tax rate is 40% and its cost of capital is 12%. Should the company proceed with the new project?

Explanation / Answer

Since , the NPV is [positive, the project can be accepted

Cash Out Flow at the Beginning Initial investment 1,500,000.00 Installation Costs 30,000.00 Fixtures 50,000.00 Total 1,580,000.00 Incremental Cash Flows for the first 4 years Incremental Operating Income 455,000.00 Add: CCA on Equipment and Fixtures 474,000.00 Less: Savings on Rent (60,000.00) Taxes on Operating Income (182,000.00) Net Cash Flows 687,000.00 Incremental Cash Flows for the next 3 years Incremental Operating Income 475,000.00 Add: CCA on Equipment and Fixtures 206,100.00 Less: Savings on Rent (60,000.00) Taxes on Operating Income (190,000.00) Net Cash Flows 431,100.00

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