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Suppose a five-year project requires an initial capital investment of $600,000 and an initial net ...

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Suppose a five-year project requires an initial capital investment of $600,000 and an initial net ...

Suppose a five-year project requires an initial capital investment of $600,000 and an initial net working capital investment of $30,000. The project is expected to provide operating revenue of $400,000 per year. The associated operating costs are expected to be $175,000 per year. The capital asset belongs to Class 7 and has a CCA rate of 15%. The asset is expected to sell for $168,000 when the project terminates. Assume the asset class remains open after the project ends and that the half-year rule applies in the first year. The firm's marginal tax rate is 40% and cost of capital is 10%. What impact would it have on the project's NPV if the operating revenue falls by 5%?

▸ NPV decreases by 63.51%.

▸ NPV decreases by 38.84%.

▸ NPV decreases by 46.19%.

▸ NPV decreases by 21.85%.

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Corporate Finance

Edition: 5^th

Author: Booth

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