Question
Consider a capital project whose initial cost, which is also capital cost, is $20 million.The project's anticipated economic life is 6 years.At the end of
Consider a capital project whose initial cost, which is also capital cost, is $20 million.The project's anticipated economic life is 6 years.At the end of each of these six years, the project is expected to produce incremental revenue of $10 million and 40% of the incremental revenue will be the incremental operating costs, other than the capital cost allowance CCA.The CCA will be claimed on a declining balance basis at the d rate of 30%. The first- year one-half rule will apply.
The corporate tax rate of the firm is 30%. The salvage value of the equipment at the end of year 6 is $6.0 million.The project's cost of capital is 12% per annum.Finally, the project will require incremental net working capital of $1.5 million now, $1.0 million at the end of the first year, and $0.5 million at the end of the second year, and thereafter incremental net working capital requirements will be zero.Calculate the NPV of this project.Also, calculate the profitability index of the project.
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