CAD Corporation is considering some new equipment whose data are shown below.

The equipment has a 3-year tax life and would be fully depreciated by the straight-line

method over 3 years, but it would have a positive pre-tax salvage value at the end of

Year 3, when the project would be closed down. Also, additional inventories would be

required, but it would be recovered at the end of the project's life. Revenues and other

operating costs are expected to be constant over the project's 3-year life. The details are

as follows:

WACC 10.0%

Net investment in fixed assets (depreciable basis) $70,000

Required inventories $30,000

Straight-line depreciation rate 33.333%

Annual sales revenues $75,000

Annual operating costs (excl. depreciation) $30,000

Expected pre-tax salvage value $2,000

Tax rate 35.0%

a. Calculate the project's NPV and decide whether the equipment should be purchased

or not (15 marks)

b. Suppose the company will incur additional $10,000 interest expense each year on the

money borrowed for the project. Explain in words how this will change your answer to

(a)? (5 marks)