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New West and Van Corporation is considering to launch an innovative product and estimates sales of 1,650,000 and total costs of $1,205,000 annually. This project requires an investment in equipment of $1,200,000 which expects to last for four years with a salvage value equal to $800,000; the CCA asset class for the equipment will continue to remain after the selling of the equipment. During this time the company will use a 20% CCA rate. At the beginning of the project, it is required to invest $125,000 in working capital which is going to be totally recovered by the end of the project. Assume a tax rate of 35%. If the company's required rate of return is 16%:
Problem a) determine the NPV of the project. Based on NPV, would you accept the project? Why?
Problem b) determine the total cash flows for year 0, 1 and the last year of the project.
Problem c) calculate the IRR for the project. Based on IRR, would you accept the project? Why?
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