Consider a four-year project that will result in cost cuts. It requires an initial investment in fixed assets in the amount of $800,000 with the CCA rate of 30% (Class 10). You will have to invest $200,000 up-front in net working capital, which will be fully recovered at the end of the project’s life. The project’s pre-tax cost savings are $400,000 per year. Assume, the equipment will be sold for $10,000 at the end of the project, and all investment in net working capital will be recovered. The firm has a tax rate of 35% and a required return of 12%. Based on this set of assumptions, answer the following questions. Please note that you do not need to do the calculations, just write the appropriate formula and plug in the appropriate numbers, without completing the calculations.

1. How would you calculate the present value of CCA tax shield? Write the appropriate formula and plug in the numbers, you do not need to perform the calculations. 
2. How would you compute the project’s NPV? Spell out the NPV equation for this particular project, plugging in the appropriate numbers but do not use any abbreviations. You do not need to perform the calculations, just spell out the equation correctly and completely. 
3. How would you calculate the project’s equivalent annual cost (EAC)? Write the appropriate formula and plug in the numbers, you do not need to perform the final calculations. You may refer to your answers in parts (a) and (b) above, if needed.

Answer rating: 100% (QA)

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