Question

Antonio Melton, the chief executive officer of Jordan Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $402,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following:

  

Year 1			Year 2			Year 3			Year 4
$	89,000		$	104,000		$	121,000		$	189,000

  

Mr. Melton agrees with his advisers that the company should use the discount rate (required rate of return) of 12 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.)

   

Required

1. a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.)

2. b.&c. Shawn Love, 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 $80,400 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. Should Mr. Melton approve the project? (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.)

	a. Net present value Should Mr. Melton approve the project? b.&c. Net present value Should Mr. Melton approve the project?

Answer 1

a.

So, Net present value is -$33,389 which is negative. So, Mr M should not approve the project

Net present value is computed above by deducting present value of cash outflows from total present value of cash inflows. As the net present value is negative which indicates present value of cash outflows is higher than present value of cash inflows

b.& c.

In this case, Net present value is also negative which is -$70,711

It means that Mr M should not approve the project

Net present value is computed above by deducting present value of cash outflows from total present value of cash inflows. As the net present value is negative which indicates present value of cash outflows is higher than present value of cash inflows

Where Cash flows after tax is computed by considering tax savings due to depreciation expense. Depreciation is non cash expense therefore, we have added back to profit after tax so, that to compute cash flows after tax

Present value of cash outflows is computed by taking PV factor 1 as payment is done immediately which means PV factor at 12 % for 0 year