Question
YYY is a company considering a new capital budgeting project. The project requiresan initial investment in a machine with a cost of $250,000. The machine
YYY is a company considering a new capital budgeting project. The project requiresan initial investment in a machine with a cost of $250,000. The machine will last for tenyears, after which it can be salvaged for the risk-free (nominal) value of $50,000. Itbelongs to a CCA asset class with CCA rate 20%, and the firm will continue to haveassets in the machine's CCA class after the machine is sold. A marketing study costing$50,000 and paid for last year states that the machine isexpected to increase annual pre-tax revenues by $100,000 in real terms and expected to increase annual pre-tax costs by$20,000 in real terms throughout the life of the machine (ten years long, with the firstimpact on revenues and costs taking place one year from today). The real interest rate forrisk free cash flows is 2% and the nominal interest rate for risky cash flows is 25%. Theinflation rate is 4%, and the firm is taxed at a rate of 40%. Calculate the NPV of theproject
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