Prof. Gandhi has pointed out that A&Y does not need $40,000 NWC for the entire length of the project. In fact, it needs only $25,000 of NWC during the first 3 years of the project and $40,000 during the remaining 4 years. If A&Y follows Prof. Gandhi's advice, i.e., invest only $25,000 in NWC at t=0 and add an additional $15,000 to NWC only at the beginning of year 4 (so that it will be available from t4 forward), by how much the NPV of the project be increased?

A&Y Inc. considers a 7-year project that requires $500,000 of investment in new machinery and $40,000 in NWC (that will stay constant for the entire life of the project). At the end of the project the equipment will be sold for a salvage value of $70,000. The cost of capital is 10%, the equipment belongs to a CCA class with d=40%, and the corporate tax rate is 30%.

Answer rating: 100% (QA)

Present ValuePV of Cash Flow Cash Flow1iN idiscount rate Cost of Capital10010 NYear of Cash Flow CAS... View the full answer