Management is considering purchasing an asset for $48,000 that would have a usef

Question

Management is considering purchasing an asset for $48,000 that would have a useful life of 5 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method. The asset would generate annual net cash inflows of $39,000 throughout its useful life. The project would require additional working capital of $9,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 8%.

What is the net present value of the asset?

Use tables to assist

http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg

http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-1.jpg

Explanation / Answer

P = 48,000 + 9,000 = 57,000 N = 5 years SV = 0, straight-line method Revenues year 1 to 4 = 39,000 per year Revenues year 5 = 39,000 + 9,000 = 48,000 Tax rate = 40% Discount rate = 8% *Years 1 to 4: Depreciation = 48,000 / 5 = 9,600 Taxable income = 39,000 - 9,600 = 29,400 Tax = Taxable income * Tax rate = 29,400 * 40% = 11,760 ATCF = 39,000 - 11,760 = 27,240 *Year 5: Depreciation = 48,000 / 5 = 9,600 Taxable income = 39,000 + 9,000 - 9,600 = 38,400 Tax = Taxable income * Tax rate = 38,400 * 40% = 15,360 ATCF = 39,000 + 9,000 - 15,360 = 32,640 NPV = - 57,000 + 27,240 (P/A,i=8%,N=4) + 32,640 (P/F,i=8%,N=5) NPV = - 57,000 + 27,240 (3.312) + 32,640 (0.681) NPV = 55,446.72

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.