Kramer Corporation is consideringtwo investment projects, each of which would re
ID: 2361536 • Letter: K
Question
Kramer Corporation is consideringtwo investment projects, each of which would require $50,000 Cost and cash flow data concerning the two projects are given below. Project A Project B Investment in high-spedd photocopier $50,000 investment in working capital $50,000 Annual net cast inflows $9,000 $9,000 Life of the project 8 years 8 years The high speed photocopier would have a salvage value of $5,000 in eight6 years. For tax purposes, the company computes depreciation deductions assuming zero salvage calue and uses straigh-line depreciation. The photocopier would be depreciated over eight years. At the end of eight years, the investment in working capital would be relesed for use elsewhere. The company requires an after tax return of 10% on all investments. the rate is 30%/ requires: Compute the net present value of each investment projects. ( round to the nearest dollar) PLEASE SHOW ALL WORK and the formula for NPV....Explanation / Answer
Y0: A B Costs: (50000) (50000) Y1-Y7: Inflows 9000 9000 Tax (30%) (2700) (2700) Dep -9000/8 (1125) (1125) Total 5175 5175 Annuity Factor= x 4.868 (From table for 10% return on 7yrs) Present Values= 25192 25192 (Now assuming your acording to your question details salvage value for A and B is taken in 8yrs for both as the question isn't clear and this is very inconvenient) (also assuming No Depreciation in year of sale) Y8: Inflows 9000 9000 Salvage 5000 5000 Total 14000 14000 Tax(30%) (4200) (4200) Total 9800 9800 Present Value factor= x 0.467 (from table for 10% for Y8) Present Val 4577 4577 Therefore NET PRESENT VALUE for each one of the investment projects: (50000)+25192+4577 = (20231) answer therefore the projects should not be taken as they present a negative value in terms of today's values.
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