Ryan is considering investing in a $400,000 piece of equipment today. It will pr
ID: 2331749 • Letter: R
Question
Ryan is considering investing in a $400,000 piece of equipment today. It will provide net before- tax operating cash inflows of $120,000 at each years end for 8 years. The company uses straight- line depreciation for a tax purposes. The income tax rate is 40% and the discount rate is 13% Income taxes are paid at year end. Calculate the net present value of the equipment. Remember income taxes. a. Positive $175,852 b. Positive $89,474 c. Positive $79,877 d. Positive $41,486 e. Positive $126,390 f. Negative $54,489 g. Negative $12,941 h. Negative $64,086 A junk yard needs a smasher. It would add net before-tax cash flows of $80,000 at the end of the first year and $70,000 at the end of the second. The initial cost of the equipment is $100,000 with a salvage value of $0. The required rate of return is 10%. The income tax rate is 40% and paid at year end. In addition, the company uses straight-line depreciation for tax purposes. What is the net present value? a. Positive $30,579 b. Positive $65,290 c. Positive $13,058 d. Positive $30,414 e. Positive $41,322 f. Negative $8,264 g. Negative $15,847 h. Negative $21,653Explanation / Answer
Part 1
Correct Answer ---- NPV will be (f ) Negative $ 54489.
Calculations
Year
Net Before tax Operating cash
Tax Expense
Net cash Inflows after tax
Discounting factor
Discounted cash flow
1
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.88495575
$ 63,717
2
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.78314668
$ 56,387
3
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.69305016
$ 49,900
4
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.61331873
$ 44,159
5
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.54275994
$ 39,079
6
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.48031853
$ 34,583
7
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.42506064
$ 30,604
8
$ 120,000.00
$ 48,000.00
$ 72,000.00
0.37615986
$ 27,084
Present value of all cash inflow
$ 345,511
Less: Initial cash Outflow
$ 400,000
Net Present value
$ (54,489)*
*Amount in bracket indicates negative amount
Part 2
Correct Answer ---- NPV will be Negative $21653.
Calculation
Year
Net before tax Operating cash
Tax Expense
Net cash Inflows after tax
Discounting factor
Discounted cash flow
1
$ 80,000.00
$ 32,000.00
$ 48,000.00
0.90909091
$ 43,636
2
$ 70,000.00
$ 28,000.00
$ 42,000.00
0.82644628
$ 34,711
Present value of all cash inflow
$ 78,347
Less: Initial cash Outflow
$ 100,000
Net Present value
$ (21,653)*
*Amount in bracket indicates negative amount
Net present value is present value of cash generated by the asset after deducting initial cash outflow. NPV in both the cases are negative which means project should not be accepted.
Part 1
Correct Answer ---- NPV will be (f ) Negative $ 54489.
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