Determine the project net present value

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IFNA Ltd. is a pulp and paper company located in northern Ontario. IFNA Ltd. has an opportunity to undertake a project, which will increase its output in the pulp mill. The project would require an immediate $4.5 million investment in new equipment that would be added to an ongoing asset pool with a 20% accelerated investment incentive rule (ACII) capital cost allowance rate. The project would have a total life of 10 years. During the first four years, the new equipment would annually generate $1.8 million in additional cash sales and would cost an additional $700,000 for cash expenses. For the following six years, additional cash sales are expected to increase to $2.5 million, and cash expenses will increase to $1.0 million. At the end of the tenth year, the project will end and the equipment will be sold. The market value of the equipment at that time is expected to be $800,000. IFNA Ltd. is subject to tax at a rate of 40%, and a 12% cost of capital applies to this project.

Required:

a) Determine the project's net present value.

b) Recommend whether this project should be accepted, based only on the capital budgeting analysis completed in part (a).

Reference no: EM133058469

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