Question: (a) A firm considers a project that would entail new investments totalling $ 1 36,000. This amount is made up of $ 1 00,000 in new machinery, and start-up costs of $36,000 that would be expensed. The firm's weighted average cost of capital is 10 percent. Assume that the machinery is depreciated on a straight-line basis for tax purposes with no salvage value at the end of year 4. The investment is expected to result in the following incremental sales revenues, costs, CCA, and taxes:
Compute the net present value and the internal rate of return for this investment.
(b) Assume the figures as given in (a), except that capital cost allowances on the machinery are to be taken on a declining balance at a rate of 30 percent. Assume also that the machinery will have a salvage value of $20,000 at the end of year 4, and that the asset class will not be left empty by the sale of the machinery at that time. Recompute the net present value of the investment. Also, compute incremental net income and net cash flows that result from the investment for year 2.