Question
NDA Inc. is considering a project which requires the purchase of a $160,000 machine. The CCA rate is 30%. When the project ends at year
NDA Inc. is considering a project which requires the purchase of a $160,000 machine. The CCA rate is 30%. When the project ends at year 7, its residual value is expected to be $18,000. This machine is the only asset in the asset class which terminates when the project ends. The project is expected to generate before tax cash flow of $38,000 per year for 7 years. If the project is all financed by equity, the cost of capital would be 12%. The corporate tax rate is 35%. NDA only has $70,000 available and DT bank is willing to provide a loan for the balance at a subsidized rate of 3% which is 2% lower than borrowing cost of NDA. However, the bank will charge 5% of the amount borrowed as flotation costs and require NDA to repay one third of the loan at the end of years 2, 4, and 7. Using the adjusted present value method, determine whether NDA should undertake the project. [Keep at least 2 decimal places for dollar amounts and 4 decimal places for rates] ***CCA with 50% rule
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