Lillington Products Inc. is considering the purchase of a machine that costs $25

Question

Lillington Products Inc. is considering the purchase of a machine that costs $250,000. The machine is expected to generate cash inflows of $85,000 each year for four years. The machine would be depreciated using the straight-line method over a four-year life and have no residual value.

The company considers the impact of income taxes in all of its capital investment decisions.

The company has a 40% income tax rate and desires a return of 12% on its capital investments.

Taking into account income taxes, what is the project

Explanation / Answer

Hi,

Please find the answer as follows:

Depreciation Per Year = 250000/4 = 62500

After Tax Annual Cash Inflows = 85000 - 62500 = 22500*(1-.40) + 62500 = 76000

NPV = - 250000 + 76000/(1+.12)^1 + 76000/(1+.12)^2 + 76000/(1+.12)^3 + 76000/(1+.12)^4 = -19161

Answer is -19161,

Thanks.

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