Question

Maiden Industries, Inc., needs a new coffee. It can buy a new high-speed coffee for $0.96 million. The coffee will cost $34,500 to run, will save the firm $129,600 in labour costs, and will be useful for 12 years. Suppose that for tax purposes, the coffee will be in an asset class with a CCA rate of 25%. Maiden has many other assets in this asset class. The coffee is expected to have a 12-year life with a salvage value of $99,000. The actual market value of the coffee at that time will also be $99,000. The discount rate is 8% and the corporate tax rate is 35%. What is the NPV of buying the new coffee?

Please dont use excel. i need to know steps. thanks.

Answer 1

NPV of the project is present value of future cash flows discounted at required rate of return less the initial investment.

To calculation NPV, free cash flow of the project can be calculated as follows:

Free Cash Flow = Operating Cash Flow - Capital Expenditures - Change in working capital

Operating Cash Flow = EBIT*(1-Tax Rate)+Depreciation

NPV can be calculated as follows:

Formula sheet