You are reviewing a capital budget proposal. According to the proposal, an investment of $455,000 in equipment,
Question:
You are reviewing a capital budget proposal. According to the proposal, an investment of $455,000 in equipment, $64,000 in inventory, and $66,000 in accounts receivable is partially offset by an increase of $25,000 in accounts payable. The equipment will be placed in the 25% CCA asset class. The projected revenue is $565,000 and $344,000 in costs each year, during the project’s six-year life cycle.
The required return on investment of 12% and the marginal income tax rate is 35%. At the end of six years, the net working capital investment is recovered in full and the equipment will have zero salvage value.
Calculate the project’s NPV using the six-step approach.
Would you recommend approval for the project?
1) Initial investment (nearest dollar without the comma, e.g. 15000)
2) PV of operating income (nearest dollar without the comma, e.g. 15000)
3) PV of CCA (nearest dollar without the comma, e.g. 15000)
4) PV of working capital (nearest dollar without the comma, e.g. 15000)
5) Net Present Value (nearest dollar without the comma, e.g. 15000)
6) Approve or reject project (choose one): Reject/ Approve