A project costs $200,000 at time 0 and generates pre-tax net cash inflows of $70,000 a year for 4 years, with no scrap value. Tax is 30%, payable in the same year as the cash flows. Tax-allowable depreciation is 25% reducing balance, first claimed in year 1, with a balancing allowance in year 4. The after-tax cost of capital is 10% (factors 0.909, 0.826, 0.751, 0.683). What is the NPV (to the nearest $)?

Correct answer: C) +$1,834

Explanation

TAD: year 1 50,000; year 2 37,500; year 3 28,125; year 4 balancing allowance 200,000 - 115,625 = 84,375. Tax savings at 30%: 15,000; 11,250; 8,437.5; 25,312.5. Annual after-tax inflow = 70,000 x 0.7 = 49,000. Net flows: 64,000.0, 60,250.0, 57,437.5, 74,312.5. PVs at 10% total $201,834, so NPV = +$1,834 (nearest $). Tax savings arise in the same year as the TAD because the question states tax is paid without a lag. Claiming only a normal 25% allowance in year 4 (21,094) instead of the balancing allowance gives -$11,133, and ignoring TAD gives -$44,719.