Question
A project requires an initial investment in equipment at a cost of $10 million and an increase in net working capital of $150,000. The investment
A project requires an initial investment in equipment at a cost of $10 million and an increase in net working capital of $150,000. The investment in net working capital will be 80% recovered at the end of the project. This project will last for 10 years, yielding annual incremental sales revenue of $6 million and costs of $3 million. At the end of the 10 years, the equipment can be sold for $100,000. The equipment is classified by CRA as Class 10, which gives it a CCA rate of 30%. Similar projects require a return of 15%. The company's corporate tax rate is 38%. Use the tax shield approach to calculate the present value of OCF. Should we recommend investment in this project?
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