Problem:
Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20 percent CCA class. Louie's expects to sell the equipment at the end of the project for 20 percent of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14 percent rate of return on this project. The tax rate is 34 percent.
The following two questions are based on the information provide in the above.
Question 1: What is the present value of the CCA tax shield for this project?
Question 2: What is the recovery amount attributable to net working capital at the end of the project?
Note: Please answer in proper manner and show all computations