Reference no: EM132632274

Alpha Company is looking enter a new project. The project involves the a few purchasing decisions. First, the Alpha needs to purchase a machine for $1,000,000. The machine is in a class 10 CCA with a rate of 20%. The machine will bring in revenues of $10,000,000 per year and will force the company to incur expenses of $3,000,000 per year. Working capital requirements are $300,000 at the beginning of the project. The working capital will be released at the end of the project.

Tooling and other set-up costs at the start of the project are estimated at $1.2 million, this expense can be written off for tax purposes using straight line amortization. This particular investment of $1.2 million will be depreciated at 10% straight-line per annum. No salvage value.

Assume the required rate of return is 10%. The Tax rate is 40%. The machine is assumed to be purchased on January 1st, 2020.

Problem 1: What is the NPV of the project? Should you accept or decline project?