Question

3. The Tassel Ltd. has been presented with an investment opportunity which will yield end of year revenue of $20,000 per year in Years 1 through 4, $25,000 per year in Years 5 through 9, and $3

4. Using the information in Q3, if the tax rate is 30%, and Tassel uses prime-cost approach for depreciations with the salvage value of $20,000, do you think Tassel should implement this investment and why? Please demonstrate your answer by showing your capital budgeting calculations (e.g., show your new project cashflows step by step and NPV calculations). (30’)0,000 in Year10. This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 per cent. What is the NPV for this investment, if ignoring tax effect and depreciations?

Answer 1

1-
Year	0	1	2	3	4	5	6	7	8	9	10
cost of machine	-150000
annual revenue		20000	20000	20000	20000	25000	25000	25000	25000	25000	30000
less depreciation =(150000-20000)/10		13000	13000	13000	13000	13000	13000	13000	13000	13000	13000
operating profit		7000	7000	7000	7000	12000	12000	12000	12000	12000	17000
less tax-30%		2100	2100	2100	2100	3600	3600	3600	3600	3600	5100
after tax profit		4900	4900	4900	4900	8400	8400	8400	8400	8400	11900
add depreciation		13000	13000	13000	13000	13000	13000	13000	13000	13000	13000
scrap value of machine											20000
net operating cash flow	-150000	17900	17900	17900	17900	21400	21400	21400	21400	21400	44900
present value factor at 10% =1/(1+r)^n r =10%	1	0.909091	0.826446	0.751315	0.683013	0.620921	0.564474	0.513158	0.466507	0.424098	0.385543
present value of cash flow = net operating cash flow*present value factor	-150000	16272.73	14793.39	13448.53	12225.94	13287.72	12079.74	10981.58	9983.258	9075.689	17310.89
Net present value =sum of present value of cash flow	-20540.5
No machine should not be purchased as it results in negative net present value
NPV without considering Depreciation and Tax
Year	0	1	2	3	4	5	6	7	8	9	10
cost of machine	-150000
annual revenue		20000	20000	20000	20000	25000	25000	25000	25000	25000	30000
cash flow	-150000	20000	20000	20000	20000	25000	25000	25000	25000	25000	30000
present value factor at 10% =1/(1+r)^n r =10%	1	0.909091	0.826446	0.751315	0.683013	0.620921	0.564474	0.513158	0.466507	0.424098	0.385543
present value of cash flow = net operating cash flow*present value factor	-150000	18181.82	16528.93	15026.3	13660.27	15523.03	14111.85	12828.95	11662.68	10602.44	11566.3
Net present value =sum of present value of cash flow	-10307.4