Question

Niekro Movie Theaters plans to buy projection equipment costing $880,000. In connection with this transaction, old equipment having a book value of $140,000 will be sold for $210,000. Annual cash flow returns from this new investment are estimated at $370,000 before taxes. Depreciation on the new equipment will be $88,000 each year for the next 10 years. No salvage value is expected on this new equipment. No further depreciation can be taken on the old equipment that will be sold. The income tax rate is 30 percent.

Using a discount rate of 20 percent, compute the NPV of the new investment: $ ______________

Answer 1

Answer -

Given data,

projection equipment costing= $880,000

old equipment having bookvalue=$140,000

sold for =$210,000.

new investment are estimated =$370,000

new equipment= $88,000

he income tax rate =30 percent.

discount rate =20 percent

Net present worth = $526,511

After duty money inflows come back from new venture every year

= $370,000 * (1-0.30)

= $259,000

Aftter charge income from devaluation charge shield

= $88,000 * 0.30

= $26,400

All out income come back from new venture = $259,000 + $26,400

= $285,400

Note - As deterioration is non money cost so it will help in charge sparing.

Present estimation of annuity at rebate pace of 20% for multi year = 4.1924

Presently present estimation of money inflow from new speculation

= $285,400 * 4.1924

= $1,196,511

Net Intial money outpouring = Purchased gear - Equipment sold

= $880,000 - $210,000

= $670,000

Net present worth = Present estimation of money inflow - Net Intial money outpouring

= $1,196,511 - $670,000

= $526,511

Net present worth = $526,511