Question

Antonio Melton, the chief executive officer of Vernon Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $420,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following:

Year 1: $87,000 Year 2: $98,000 Year 3: $123,000 Year 4: $187,000

Mr. Melton agrees with his advisers that the company should use the discount rate (required rate of return) of 14 percent to compute net present value to evaluate the viability of the proposed project.

(Use appropriate factor(s) from the tables provided.)

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.)

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 $84,000 per year for the four-year period. The company's income tax rate is 40 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 this 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 approbe the project?:

b.&c. Net present value:

Should Mr. Melton approve the project?:

Answer 1

1-
Year	cash flow	present value factor at 14% =1/(1+r)^n r =14%	present value of cash flow = cash flow*present value factor
0	-420000	1	-420000
1	87000	0.877193	76315.79
2	98000	0.769468	75407.82
3	123000	0.674972	83021.5
4	187000	0.59208	110719
Net present value =sum of present value of cash flow			-74536
No project should not be accepted as NPV is negative.
2-
Year	Annual depreciation	Tax rate 40%	Depreciation tax shield = annual depreciation*tax rate
1	84000	40%	33600
2	84000	40%	33600
3	84000	40%	33600
4	84000	40%	33600
Year	cash flow = cash flow+depreciation tax shield	present value factor at 14% =1/(1+r)^n r =14%	present value of cash flow = cash flow*present value factor
0	-420000	1	-420000
1	120600	0.877193	105789.5
2	131600	0.769468	101261.9
3	156600	0.674972	105700.5
4	220600	0.59208	130612.9
Net present value =sum of present value of cash flow			23365
yes project should be accepted as NPV is negative.