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A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the...
A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $50,000. Projected sales volume for each year of the project is shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4 through 6. A $30,000 initial investment in net working capital (NWC) is required, with additional investments equal to 7.5% of annual sales for each year of the project. The previous year’s NWC investment, including the initial $30,000, is recovered at the end of each year. So, at the end of year 1, the firm recovers the $30,000 initial investment and invests a new NWC investment equal to 7.5% of year 1 sales. At the end of year 6, no NWC investment is needed as the project is completed.Variable costs are $35 per unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on investment of 12%. Year 1 2 3 4 5 6Sales 10,000 12,500 15,625 19,531 24,414 30,518REQUIRED:a. What is the amount of net additions to (recoveries of) NWC during year 4 of the project? (3 marks) b. What is the operating cash flow during year 5 of the project? (2 marks) c. What is the NPV of the project? (Suggest using Excel for this one.) (10 marks)d. What would be the present value of the depreciation tax shield(s), if, instead of using straight-line depreciation, the asset was depreciated using CCA rules, assuming it fell into a 20% CCA class? (No need to re-calculate Net Present Value.) (5 marks)
