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Question - New Project Analysis
The marketing department has proposed selling your company's product line in a new export market. Production equipment (Class 43) with a CCA rate of 30% costing $100,000 will be needed, as will installation and training estimated at $10,000 each. These costs will all occur at time 0. Project cash flows before tax are forecast to be $40,000 per year over the 4-year project life. An initial investment in net working capital of $4,000 will be needed, and each year net working capital will increase by $2,000. The equipment will likely be obsolete at the end of the 4 years, so no salvage value is forecast. The company's tax rate is 25%, and its cost of capital is 11%.
Required -
1. Should the company sell into the new market?
2. What is the project's NPV if the equipment had a salvage value of $20,000?
3. Assuming no salvage value, what is the NPV if the CCA rate is 10%?
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