Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flo

Question

Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flows are expected to be $30,000 each year for six years. At the end of the asset’s life, there will be a $10,000 residual (salvage) value. The income tax rate is 30%, and the company uses straightline depreciation with no half-year convention. Taking into account income tax effects, what is the net present value if the cost of capital is 12%? Round to nearest whole dollar.

You should end up with roughly $8,854. Im just not sure how to come up with that answer.

Explanation / Answer

Year 1 2 3 4 5 6 Cost of Asset          102,000 Annual operating cash flows            30,000          30,000          30,000          30,000          30,000          30,000 Income tax rate 30% 30% 30% 30% 30% 30% Depreciation (Straight-line method)            15,333          15,333          15,333          15,333          15,333          15,333 Operating Cash Flow after Depreciation            14,667          14,667          14,667          14,667          14,667          14,667 Tax              4,400            4,400            4,400            4,400            4,400            4,400 After Tax Operating cash flows            25,600          25,600          25,600          25,600          25,600          25,600 Residual ( Salvage) value          10,000 Total Cash Inflow            25,600          25,600          25,600          25,600          25,600          35,600 Cost of Capital 12% 12% 12% 12% 12% 12% Discounted Cash Flows            22,857          20,408          18,222          16,269          14,526          18,036 Total Cash Inflows in 6 years          110,318 Cash Outflow in First year          102,000 Net Present Value              8,318

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