Question: Consider the following investment:

Initial Investment                                    $ 10,000

Additional operating revenues

    Year 1 and 2                                      $ 3,500 each year

    Year 3 and 4                                      $ 4,000 each year

Given a discount rate of 8 percent, a maximum rate for capital cost allowances on a declining balance of 20 percent, and a corporate tax rate of 40 percent, calculate:

(a) The net cash flows generated by the project during the first 4 years;

(b) The present value of the total tax shield from CCA;

(c) The net present value and internal rate of return for this project;

(d) The payback period to the nearest year (round up); and

(e) The net present value of the project, assuming that a salvage value of $2,000 can be realized at the end of the 4th year.