You need to determine the viability of a project. The project will cost $650,000 today and have a life of 8 years. It has an unusal CCA rate of 14.0% and is expected to be sold for $100,000 at the end of the project's life. Annual sales revenue is expected to be $585,000 and annual costs are expected to be $465,000. The tax rate is 35.0% and the project's discount rate is 8.5%. Part A: Compute the NPV of the project and state whether you should proceed or not. Part B: Oops - the accountants made a mistake! The actual CCA rate is: 17.0%. Assuming all else is equal, compute the NPV of the project using the new CCA rate and state how much this improves or reduces the NPV of the project

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Topic Video
Question
You need to determine the viability of a project. The project will cost $650,000
today and have a life of 8 years. It has an unusal CCA rate of 14.0% and is expected
to be sold for $100,000 at the end of the project's life. Annual sales revenue is
expected to be $585,000 and annual costs are expected to be $465,000. The tax
rate is 35.0% and the project's discount rate is 8.5%. Part A: Compute the NPV of
the project and state whether you should proceed or not.
Part B: Oops - the accountants made a mistake! The actual CCA rate is: 17.0%.
Assuming all else is equal, compute the NPV of the project using the new CCA rate
and state how much this improves or reduces the NPV of the project.
Transcribed Image Text:You need to determine the viability of a project. The project will cost $650,000 today and have a life of 8 years. It has an unusal CCA rate of 14.0% and is expected to be sold for $100,000 at the end of the project's life. Annual sales revenue is expected to be $585,000 and annual costs are expected to be $465,000. The tax rate is 35.0% and the project's discount rate is 8.5%. Part A: Compute the NPV of the project and state whether you should proceed or not. Part B: Oops - the accountants made a mistake! The actual CCA rate is: 17.0%. Assuming all else is equal, compute the NPV of the project using the new CCA rate and state how much this improves or reduces the NPV of the project.
Expert Solution
steps

Step by step

Solved in 4 steps with 8 images

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education