Question
A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and
A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years.
The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $500,000, which will be recovered at the end of the project.
The companys CCA rate is 25% and the corporate tax rate is 34%.
The companys target capital structure is 70% equities and 30% debt.
The cost of equity is 12% while the cost of debt before tax is 5%.
WACC= 9.39%
Calculate NPV. Should the company go ahead with the purchase?
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