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XYZ inc. considers an investment project that requires $200,000 in new equipment and $30,000
in extra NWC at the beginning of the project. The NWC will need to be increase by another
$10,000 at the end of year t=1 and it will remain at the $40,000 level until the project is
completed. The projects will lead to an increase in operating pre-tax net revenue of $75,000 per
year and will last for 3 years. At the end of the project (beginning of year t=6), the equipment
can be sold for the salvage value of $70,000. The equipment belongs to the CCA class with
d=30%, the corporate income tax rate is 40%, and the cost of capital is 7%
a.Find the projects NPV.
b.
By how much NPV would have changed if XYZ would be able to postpone the
$10,000 NWC by 1 year, i.e., increase it by $10,000 at t=2 instead of t=1?
c.
By how much NPV would have changed if XYZ would be able to sell the
equipment for the salvage value of $80,000 instead of $70,000? Hint: do not forget about the tax
shield.
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