Assignment:
A firm is considering the purchase of equipment which will cost $3 million. This equipment will last for 10 years, at the end of which it can be sold for $800,000. The CCA rate for this asset class is 30%, and the firm expects to have other assets in this asset class at the end of year 10. This equipment is expected to increase before-tax operating cash flows by $750,000 per year.
However, in order to put the equipment to use, an additional $150,000 will need to be invested in net working capital initially (i.e., at t=0). The required rate of return is 16% and the firm's marginal tax rate is 35%.