Question
Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and
Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and clear, and it would sell it for $100,000 after taxes if the company decides not to open the new office. The equipment that would be used would be depreciated by the straight-line method over the project's 3-year life, and would have a zero salvage value. An extra $5,000 of new working capital would be required to get this project running. Revenues and cash operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint:Cash flows are constant in Years 1-3 and the increased working capital will be recovered when this project ends. A simplified CCA is for mathematical convenience.)
WACC10.0%Net equipment capital cost$65,000
Annual CCA deduction for equipment$21,665
Sales revenues, each year$150,000
Cash operating costs, each year$25,000
Tax rate3.5%
a.$54,672
b.$55,915
c.$50,464
d.$47,940
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