11. A firm is evaluating a cost-saving project that is expected to save the firm
ID: 2733963 • Letter: 1
Question
11. A firm is evaluating a cost-saving project that is expected to save the firm $225,000 before taxes each year. The company’s tax rate is 30%. The project requires equipment that will cost $1.35 million to install. The equipment has a 10-year lifetime and its value will be depreciated to zero over its life. It is expected that the equipment will be able to be sold for $50,000 in 10 years. The project also requires an initial net working capital investment of $5,000, which will be recouped at the end of the project. The required return for this project is 10%.
-What is the NPV?
-What is the project PI?
- Find the project payback period
- Should they persue the project, why or why not?
Explanation / Answer
1. NPV : $461,563.04
2.
$ 1.34
3. Project Payback Period
4. Yes, they should pursue the project as the NPV @ 10% is positive.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Equipment Cost $ (1,350,000.00) Initial Working Capital $ (5,000.00) Savings before Tax $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 Savings after Tax $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 $ 157,500 Depreciation $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 Recovery Value of Asset $ 50,000 Total Cash Flow $ (1,355,000.00) $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 292,500 $ 342,500 PV of Cash Flow $ (1,355,000.00) $ 265,909.09 $ 241,735.54 $ 219,759.58 $ 199,781.44 $ 181,619.49 $ 165,108.62 $ 150,098.75 $ 136,453.41 $ 124,048.55 $ 132,048.58 NPV $ 461,563.04Related Questions
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