Reference no: EM132946119

Question - Lavina Corp. is reviewing an investment in a new product line. The cost of the new equipment to produce this new product will be $1,650,000. The equipment has a useful life of 12 years, but the project planning horizon is only seven years. The equipment will qualify for the 50% CCA rate and be eligible for full (100%) expensing in the year of acquisition (assume that the CCA writeoff happens at the end of the first year). At the end of seven years, the equipment is estimated to be worth $740,000, and at the end of 12 years it can be sold for scrap valued at $57,000. When the equipment is sold, assume that there will be a positive balance in UCC remaining. Revenues from the new product are expected to be $1,850,000 annually for the seven years. Related cost of goods sold and other operating costs will be $1,265,000 annually. Additional working capital is expected to be $250,000. The equipment will be built in a part of the existing building that Lavina is currently leasing to an outside party. The remaining term of the lease is seven years, and the annual rental income received is $251,000.

The company has projected that with the introduction of the new product, sales are expected to decline for one of the existing products. It is estimated that sales of this other product will be lower by $257,000 for the first three years only. The gross profit margin on these sales is 55%. The company has an income tax rate of 28% and a cost of capital of 12%. What is the net present value (NPV) of this project?

a) -$375,295

b) -$262,208

c) -$17,769

d) $562,554