Question 10 (2.5 points) Darlington Company is considering investing in an equip
ID: 2470189 • Letter: Q
Question
Question 10 (2.5 points)
Darlington Company is considering investing in an equipment, which will increase yearly cash revenues by $65000, and yearly cash expenses to operate the equipment by $30,000. The asset will cost $200,000, and will last 8 years, with a salvage value of $40,000. Assuming a tax rate of 39%, determine the net present value of this asset, if the company requires a 10% return on investments.
Question 10 options:
($5,405)
$174,195.25
$5,405
($25,804.75)
($5,405)
$174,195.25
$5,405
($25,804.75)
Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Asset cost (200,000) Salvage 40,000 Increase in Revenue 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 Cash Expenses (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) Depreciation (20,000) (20,000) (20,000) (20,000) (20,000) (20,000) (20,000) (20,000) Taxable income 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Tax @39% (5,850) (5,850) (5,850) (5,850) (5,850) (5,850) (5,850) (5,850) Post Tax Income 9,150 9,150 9,150 9,150 9,150 9,150 9,150 9,150 Add Back depreciation 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Net Cash flow(including salvage) (200,000) 29,150 29,150 29,150 29,150 29,150 29,150 29,150 69,150 PV factor 10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 PV of Cash flows (200,000) 26,500 24,091 21,901 19,910 18,100 16,454 14,959 32,259 NPV = $ (25,826.61) The closest no is $ (25,804.75) so option is $ (25,804.75) *The difference is due to PV factor digits taken by excel
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