Troy Batkin, the chief executive officer of Batkin Corporation, has assembled hi
ID: 2497811 • Letter: T
Question
Troy Batkin, the chief executive officer of Batkin Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $400,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following.
Mr. Batkin agrees with his advisers that the company should use the discount rate (required rate of return) of 7 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Ruchin Oruh, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $80,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the company’s expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. (Round intermediate computation of dollar amounts to the nearest whole dollars.)
Year 1 Year 2 Year 3 Year 4 $84,000 $96,000 $120,000 $180,000Explanation / Answer
case 1 ) Present value of cash flow = (PVF@7%,1 *CF1 ) +(PVF@7%,2 *CF2 ) ....(PVF@7%,4 *CF4)
= (.93458 *84000) )+(.87344*96000)+(.81630*120000)+(.76290*180000)
= 78504.72+ 83850.24+ 97956+ 137322
= 397632.96
NPV = Present value -Initial investment
= 397632.96 - 400000
= - 2367.04
case2) Tax shield on depreciation = 80000 * .30 = 24000
Present value of tax shield = PVAF@7%, 4 *Tax shield
= 3.38721* 24000
= 81293.07
NPV = NPV before + Present value of tax shield
= -2367.04 +81293 .07
= 78926.03
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