# Question

Calculate the NPV of the project described in Practice Problem 41, but assume that the project would generate annual revenue of $70,000 and annual costs of $40,000 for six years.

Assume the discount rate has changed based on the following information: RF = 3.4%; project beta = 1.2; the market risk premium = 5.5%; and the firm is financed entirely by equity. Assume the asset class will remain open. What is the percentage change in the NPV because of the change in the discount rate? Decide whether or not the project should be accepted.

GG Inc. has a project that requires purchases of capital assets costing $40,000 and additional raw material inventory of $2,000. Shipping and installation costs are $1,500. GG Inc. estimated that the project would generate an annual operating after-tax cash flow of $5,600 for six years at each year end. At the end of the project, the assets can be sold for $4,000, while the additional inventory that was tied up will be released. The assets are in asset class 9, which has a CCA rate of 30 percent. The tax rate = 40%, and k = 15%. The ending UCC = $8,469. Calculate PV of CCA tax shield by formula. Calculate the NPV of the project if the asset class is closed on termination of the project. Decide whether or not GG Inc. should accept the project.

Assume the discount rate has changed based on the following information: RF = 3.4%; project beta = 1.2; the market risk premium = 5.5%; and the firm is financed entirely by equity. Assume the asset class will remain open. What is the percentage change in the NPV because of the change in the discount rate? Decide whether or not the project should be accepted.

GG Inc. has a project that requires purchases of capital assets costing $40,000 and additional raw material inventory of $2,000. Shipping and installation costs are $1,500. GG Inc. estimated that the project would generate an annual operating after-tax cash flow of $5,600 for six years at each year end. At the end of the project, the assets can be sold for $4,000, while the additional inventory that was tied up will be released. The assets are in asset class 9, which has a CCA rate of 30 percent. The tax rate = 40%, and k = 15%. The ending UCC = $8,469. Calculate PV of CCA tax shield by formula. Calculate the NPV of the project if the asset class is closed on termination of the project. Decide whether or not GG Inc. should accept the project.

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