15. ABC Co. is considering a new project whose data are shown below. The equipme

Question

15. ABC Co. is considering a new project whose data are shown below. The equipment has a constant capital cost allowance (CCA) over its 3-year life with a zero salvage value. No new working capital will be required. Revenues and cash operating costs are expected to be constant over the project’s 3-year life. However, this project would compete with other ABC products and would reduce their pre-tax annual cash flows. What is the project’s NPV?

Relevant discount rate 10%
Pre-tax cash flow reduction in other products
(cannibalization) $5,000
Investment cost $65,000
Annual CCA $21,665
Annual sales revenues $75,000
Annual cash operating costs $25,000
Corporate tax rate 35%
____
A) $25,269
B) $26,599
C) $27,929
D) $29,325
Hint: Cash flows are constant in years 1 to 3. The proposed CCA is for computational convenience although the actual CCA varies in years 1 to 3.

Explanation / Answer

B) $26,599

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