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Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net ...

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Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net ...

Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net working capital investment of $25,000. The project is expected to provide operating revenue of $350,000 per year. The associated operating costs are expected to be $150,000 per year. The capital asset belongs to Class 8 and has a CCA rate of 20%. The asset is expected to sell for $36,000 when the project ends. Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year. The firm's marginal tax rate is 40% and cost of capital is 8%. What impact would it have on the project's NPV if the operating costs increase by 5%?

▸ NPV decreases by 10.96%.

▸ NPV decreases by 8.66%.

▸ NPV decreases by 8.96%.

▸ NPV decreases by 8.22%.

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Corporate Finance

Edition: 5^th

Author: Booth

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