A project will require the investment of $108,000 in equipment (straight line depreciation with a depreciable...

A project will require the investment of $108,000 in equipment (straight line depreciation with a depreciable life of 10 years and zero salvage value). The annual project income after all expenses except depreciation have been paid is projected to be $24,000. Assume a 34% income tax rate for this corporation. The corporation wants a 15% after-tax rate of return on its investments after 10 years. Determine by present worth analysis whether this project should be undertaken.

Expert Solution

Initial Investment = 108000

Depreciation each year = 108000/10 = 10800

Salvage value = 0

Tax =34% applicable only on (Net Cash flow before depreciation and tax - depreciation)

Final net cash flow each year = Cash inflow after tax + Depreciation

using excel

Year	Depreciation	Net Cash Flow bef Depreciation and Tax	Tax Rate	Net annual after depreciation and tax	Net annual cash Flow	Discount Factor @ 15%	Present Value of Net annual cash flow
1	10,800.00	24,000.00	34%	8712	19,512.00	0.869565	16,966.96
2	10,800.00	24,000.00	34%	8712	19,512.00	0.756144	14,753.88
3	10,800.00	24,000.00	34%	8712	19,512.00	0.657516	12,829.46
4	10,800.00	24,000.00	34%	8712	19,512.00	0.571753	11,156.05
5	10,800.00	24,000.00	34%	8712	19,512.00	0.497177	9,700.91
6	10,800.00	24,000.00	34%	8712	19,512.00	0.432328	8,435.58
7	10,800.00	24,000.00	34%	8712	19,512.00	0.375937	7,335.28
8	10,800.00	24,000.00	34%	8712	19,512.00	0.326902	6,378.51
9	10,800.00	24,000.00	34%	8712	19,512.00	0.284262	5,546.53
10	10,800.00	24,000.00	34%	8712	19,512.00	0.247185	4,823.07
							97,926.21

showing formula in excel

Year	Depreciation	Net Cash Flow bef Depreciation and Tax	Tax Rate	Net annual after depreciation and tax	Net annual cash Flow	Discount Factor @ 15%	Present Value of Net annual cash flow
1	=108000/10	24000	0.34	=(C2-B2)*(1-D2)	=E2+B2	=1/1.15^A2	=G2*F2
2	=108000/10	24000	0.34	=(C3-B3)*(1-D3)	=E3+B3	=1/1.15^A3	=G3*F3
3	=108000/10	24000	0.34	=(C4-B4)*(1-D4)	=E4+B4	=1/1.15^A4	=G4*F4
4	=108000/10	24000	0.34	=(C5-B5)*(1-D5)	=E5+B5	=1/1.15^A5	=G5*F5
5	=108000/10	24000	0.34	=(C6-B6)*(1-D6)	=E6+B6	=1/1.15^A6	=G6*F6
6	=108000/10	24000	0.34	=(C7-B7)*(1-D7)	=E7+B7	=1/1.15^A7	=G7*F7
7	=108000/10	24000	0.34	=(C8-B8)*(1-D8)	=E8+B8	=1/1.15^A8	=G8*F8
8	=108000/10	24000	0.34	=(C9-B9)*(1-D9)	=E9+B9	=1/1.15^A9	=G9*F9
9	=108000/10	24000	0.34	=(C10-B10)*(1-D10)	=E10+B10	=1/1.15^A10	=G10*F10
10	=108000/10	24000	0.34	=(C11-B11)*(1-D11)	=E11+B11	=1/1.15^A11	=G11*F11
							=SUM(H2:H11)

Net Present value = -108000+97926.21 = - 10073.79

As present worth is -ve therefore project should not be undertaken

Rahul Sunny answered 2 years ago

A project will require $511,800 for manufacturing equipment. The equipment will be depreciated straight-line to a...

A project will require $511,800 for manufacturing equipment. The equipment will be depreciated straight-line to a zero book value over the six-year life of the project. At the end of the project, the equipment will be worth about 10 percent of what we paid for it. We will have to invest $47,000 in net working capital at the start. The net working capital will be recovered at the end of the project. The project is expected to generate annual sales...

Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero...

Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21 percent. What is the sensitivity of OCF to changes in the sales price? $59,470 per $1 of sales $61,600 per $1 of sales $78,700 per $1 of sales $74,260 per $1...

Consider a four-year project with the following information: initial fixed asset investment = $570,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $570,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $30; variable costs = $22; fixed costs = $210,000; quantity sold = 87,000 units; tax rate = 22 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Consider a four-year project with the following information: initial fixed asset investment = $600,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $600,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $35; variable costs = $28; fixed costs = $240,000; quantity sold = 90,000 units; tax rate = 25 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places) change in OCF/change in Q = ?

Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $22; fixed costs = $170,000; quantity sold = 78,000 units; tax rate = 32 percent. What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage What is the...

Consider a four-year project with the following information: initial fixed asset investment = $510,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $510,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $20; variable costs = $10; fixed costs = $150,000; quantity sold = 81,000 units; tax rate = 34 percent. What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage What is the...

Consider a four-year project with the following information: initial fixed asset investment = $625,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $625,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $51; variable costs = $39; fixed costs = $300,000; quantity sold = 121,000 units; tax rate = 23 percent. a. What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) b. What is the...

Consider a four-year project with the following information: initial fixed asset investment = $550,000; straight-line depreciation...

Consider a four-year project with the following information: initial fixed asset investment = $550,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $36; variable costs = $24; fixed costs = $225,000; quantity sold = 76,000 units; tax rate = 23 percent. a. What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) b. What is the degree...

Consider a five-year project with the following information: initial fixed asset investment = $420,000; straight-line depreciation...

Consider a five-year project with the following information: initial fixed asset investment = $420,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $32/unit; variable costs = $15.60/unit; fixed costs = $148,000 per year; quantity sold = 100,000 units per year; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., how much does OCF change given an increase of one unit sold in a year)?

Consider a five-year project with the following information: initial fixed asset investment = $402,000; straight-line depreciation...

Consider a five-year project with the following information: initial fixed asset investment = $402,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $31/unit; variable costs = $10.40/unit; fixed costs = $147,000 per year; quantity sold = 84,000 units per year; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., how much does OCF change given an increase of one unit sold in a year)? $14.29 $15.45 $16.10 $13.80 $12.88

Question