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12-3 If the Company AD has an equipment with original cost $20,000,000, depreciation is 80% of the...

12-3 If the Company AD has an equipment with original cost $20,000,000, depreciation is 80% of the cost of equipment, and the book value is $4,000,000. At the end of its physical life time year, if the Company can sell the equipment for $5,000,000 in the market, what is the gain on sale? What is the m,

12-4 If the Company XYZ plans to invest on a project with initial capital outlay of $40,000, and annual cash inflow $9,000 for 10 years, what’s the NPV of the project if the discount rate is 10%? Should the Company accept this project?

Expert Solution

12-3. Gain on sale = Sale proceeds - Book value

Gain on sale = $5000000 - $4000000 = $1000000

12-4. Net Present value (NPV) is the present value of future cash inflows minus the initial investment.

Here, the cash inflows will be same every year, so it is an annuity. For calculating the present value of annuity, we will use the following formula:

PVA = P * (1 - (1 + r)^-n / r)

where, P is the periodical amount = $9000, r is the rate of interest = Discount rate = 10% and n is the time period = 10

Now, putting these values in the above formula, we get,

PVA = $9000 * (1 - (1 + 10%)^-10 / 10%)

PVA = $9000 * (1 - (1 + 0.10)^-10 / 0.10)

PVA = $9000 * (1 - (1.10)^-10 / 0.10)

PVA = $9000 * (1 - 0.38554328943) / 0.10

PVA = $9000 * (0.61445671057 / 0.10)

PVA = $9000 * 6.1445671057

PVA = $55301.10

Present value of future cash flows = $55301.10

Initial investment (given) = $40000

Net Present value (NPV) = Present value of future cash inflows - initial investment

Net Present value (NPV) = $55301.10 - $40000 = $15301.10

jeff jeffy answered 2 years ago

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