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XYZ inc. considers an investment project that requires $200,000 in new equipment and $30,000 in...

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Finance

XYZ inc. considers an investment project that requires $200,000 in new equipment and $30,000

in extra NWC at the beginning of the project. The NWC will need to be increase by another

$10,000 at the end of year t=1 and it will remain at the $40,000 level until the project is

completed. The projects will lead to an increase in operating pre-tax net revenue of $75,000 per

year and will last for 3 years. At the end of the project (beginning of year t=6), the equipment

can be sold for the salvage value of $70,000. The equipment belongs to the CCA class with

d=30%, the corporate income tax rate is 40%, and the cost of capital is 7%

a.Find the projects NPV.

b.

By how much NPV would have changed if XYZ would be able to postpone the

$10,000 NWC by 1 year, i.e., increase it by $10,000 at t=2 instead of t=1?

c.

By how much NPV would have changed if XYZ would be able to sell the

equipment for the salvage value of $80,000 instead of $70,000? Hint: do not forget about the tax

shield.

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