A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years. The company completed a cost survey prior to going ahead which cost a total of $200,000. The company has to borrow $5m to help finance the project. The interest cost is $200,000 per year for the duration of the project. The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $500,000, which will be recovered at the end of the project. The company’s CCA rate is 25% and the corporate tax rate is 34%. The company's WACC is 9.39% Calculate PVCCATs using the Tax Shield Approach
A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years. The company completed a cost survey prior to going ahead which cost a total of $200,000.
The company has to borrow $5m to help finance the project. The interest cost is $200,000 per year for the duration of the project.
The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $500,000, which will be recovered at the end of the project.
The company’s CCA rate is 25% and the corporate tax rate is 34%.
The company's WACC is 9.39%
Calculate PVCCATs using the Tax Shield Approach
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
