Question

Beyond -Say Corp. is considering purchasing $55,000 of music recording equipment. The equipment has a market resale value of $3,000 and is expected to be used over the next four years. Net income after taxes is estimated to be $4,200. The company's required rate of return is 10% and the company uses the straight-line method. The tax rate is 40%. Is this a project that should be undertaken?

Answer 1

		Amount in $
	Net Income after tax	4,200
	Add: Depreciation	13,000	(55,000 - 3,000 ) / 4
	Net annual cash inflow	17,200
		Amount in $
	Present value of net annual cash inflow	54,522	( 17,200 x 3.16987 )
	Present value of Salvage value	2,049	(3,000 x 0.68301 )
	Total	56,571
	Less: Initial Investment	55,000
	Net Present value	1,571
	The project should be undertaken as the Net present value is Positive.