blem 3. Said Company is considering the purchase of a new piece of equipment for

Question

blem 3. Said Company is considering the purchase of a new piece of equipment for $45,000. The projected after-tax net income associated with this investment is $3,000 for each of the next three years. The company uses straight-line depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company considers a 12% return on investment to be satisfactory. Note: You will be required to calculate. as part of your answer, the appropriate discount rate for a three-year annuity, at 12%) Required: 1) Calculate present value of cash flows for each year and complete the following schedule: Year After-tax Annual Annual After Present Value Present Value of Cash Depreciation Tax Cash Flows Net Income factors 1.000 0.893 0.797 0.712 Flows 0. 2) As indicated in the above schedule, what is the net present value (NPV) of this proposed investment?

Explanation / Answer

1) Calculate Present value of each Cash flows :

2) Net present value = Present value of cash inflows-Present value of cash outflows

= 43236-45000

Net present value = -1764

Year After tax net income Annual depreciation After Tax cash flows Present value factors Present value of cash flows 0 (45000) 1.000 (45000) 1 3000 15000 18000 0.893 16074 2 3000 15000 18000 0.797 14346 3 3000 15000 18000 0.712 12816

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