Question
Orange Inc. invests in a project that requires purchasing a new machine. The cost of machine is$60,000. The machine has a CCA rate of 30%.
Orange Inc. invests in a project that requires purchasing a new machine. The cost of machine is$60,000. The machine has a CCA rate of 30%. When the project ends at year 15, Orange expects the residual value to be$5,000. The asset class remains open and has a positive UCC. The project is expected to generate before tax cash flow of $12,500 per year for 15 years. The required rate of return for the project under all equity financing is 14%.Orange plans to finance the project with 60% of equity and 40% of debt.Its borrowing cost is 9% and the flotation cost is 5% of amount borrowed. To encourage investment, the Ontario government will subsidize the project with a $10,000 loan at interest rate of 2%. This government loan has no flotation cost but requires Orange to repay 60% of the loan at year 10 and the remaining balance at year 15. Using the adjusted present value method, calculate the net present value of the project. The corporate tax rate is 30%.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started