The equipment required for a four year project costs $60,000 and belongs in a 20% CCA class. The project generates after-tax operating income of $13,750 and the fixed assets will be sold for $7,000 at the termination of the project. If the firm has a tax rate of 34% and a required return of 10%, what is the NPV? 

NPV = $265

Step-by-step explanation

NPV = Present Value of Operating Income +Present Value of CCA tax shield - Net capital spending

• Present value of operating income = 13750* PVIFA(n = 4 ; r = 10) = 13750*3.169865 = $43,585.65

Present value of CCA tax shield:

CCA tax shield = {[C * d * Tc / (k+d)] * [(1+0.5k) / (1+K)]} - [(S * d * Tc) / (k + d)] * 1 / (1+k)^n

C = price of the asset

d = depreciation rate

k = discount rate

n = time period

S = sale value of the asset

Present value of CCA tax shield = {[60000*0.2*0.34 / (0.1 + 0.2)]*[(1 + 0.5*0.1 / (1+0.1)] - [(7000*0.2*0.34) / (0.2+0.1)*(1.10)^4 ] 

• Present value of CCA tax shield = = 12,981.82 - 1083.72 = $11898.10
• Net capital spending = 60,000 - (7000 / 1.10^4) = $55218.91

NPV = $43,585.65 + $11898.10 - $55218.91 = $265