Tamarisk Company\'s tax rate is 40 percent and the appropriate discount rate is

Question

Tamarisk Company's tax rate is 40 percent and the appropriate discount rate is 11 percent. It is considering a project. Each asset class is large and continues after the project terminates. Tamarisk is not capital constrained. There is no change in net working capital at the beginning or at the termination of the project. The initial investment is $4,080; annual pre-tax operating cash flow is $2,190; salvage value is 0; the CCA rate is 30 percent; and the length of the project is three years. Calculate the NPV. (Round present value factor calculations to 6 decimal places, e.g. 1.251247 and the final answer to 2 decimal places, e.g. 15.75. Enter negative amounts using either a negative sign preceding the number e.g. -45.25 or parentheses e.g. (45.25).) Should Tamarisk take this project?

Explanation / Answer

Tax savings on Depreciation

Depreciation as per CCA rate will be on the amount of asset less any CCA previously claimed.

Present value of Cash inflows

NPV

NPV = PV of cash inflows - Initial investment = ($1,624.86 + $1,344.63 + $1,136.20) - $4,080 = $25.69

Since, NPV is positive, tamarisk should take the project.

Year Opening Balance Depreciation (30% x opening balance) Closing Balance Tax Savings (Dep x 40%) 1 $4,080 $1,224 $2,856 $489.60 2 $2,856 $856.80 $1999.20 $342.72 3 $1999.20 $599.76 $1,399.44 $239.904

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