Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and clear, and it would sell it for $120,000 after taxes if the company decides not to open the new office. The equipment that would be used would be depreciated by the straight-line method over the project’s 3-year life, and would have a zero salvage value. An extra $6,000 of new working capital would be required to get this project running. Revenues and cash operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1–3 and the increased working capital will be recovered when this project ends. A simplified CCA is for mathematical convenience.)
| WACC | 9% |
| Net equipment capital cost | $85,650 |
| Annual CCA deduction for equipment | $28,550 |
| Sales revenues, each year | $210,000 |
| Cash operating costs, each year | $30,000 |
| Tax rate | 36% |
◦
$116,940
◦
$110,604
◦
$118,672
◦
$119,915
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