Question
In: Finance
A company is buying a new system. It would cost $600,000 today. Depreciate straight line to...
A company is buying a new system. It would cost $600,000 today.
Depreciate straight line to $0 over 2 years, and hauled away for
nothing, so the after-tax cash flow would be $0 in year 2.
The system is expected to reduce costs by 400,000 in year 1 and
400,000 in year 2.
If the tax rate is 30% and the cost of capital is 10% what is the
NPV of the system?
Solutions
Expert Solution
| Year 0 | Year 1 | Year 2 | |
| Savings in cost | - | 400,000 | 400,000 |
| Less: Depreciation | - | 300,000 | 300,000 |
| Profit before tax | - | 100,000 | 100,000 |
| Tax at 30% | - | 30,000 | 30,000 |
| Profit after tax | - | 70,000 | 70,000 |
| Add back depreciation | - | 300,000 | 300,000 |
| Cash flow after tax | - | 370,000 | 370,000 |
| Initial Investment | (600,000) | - | - |
| Total Cash flow | (600,000) | 370,000 | 370,000 |
| Discount Factor at 10% | 1 | 0.909091 | 0.826446 |
| Disconted Cash flow | (600,000) | 336,363.64 | 305,785.12 |
| NPV = | 42,148.76 |
NPV = Sum of discounted cash inflow - cash outflow
We add back depreciation because it is a non cash expense.
Straight line depreciation = Cost of asset / Useful life
Excel formulas:
Discount Factor formula without excel:
Where,
i = rate of return
n = number of periods
jeff jeffy answered 2 years agoRelated Solutions
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification
system. The new system would be purchased today for 19,200 dollars.
It would be depreciated straight-line to 1,400 dollars over 2
years. In 2 years, the system would be sold and the after-tax cash
flow from capital spending in year 2 would be 2,000 dollars. The
system is expected to reduce costs by 6,600 dollars in year 1 and
by 14,700 dollars in year 2. If the tax rate is 50 percent...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification
system. The new system would be purchased today for 18,400 dollars.
It would be depreciated straight-line to 1,000 dollars over 2
years. In 2 years, the system would be sold and the after-tax cash
flow from capital spending in year 2 would be 1,900 dollars. The
system is expected to reduce costs by 6,700 dollars in year 1 and
by 14,800 dollars in year 2. If the tax rate is 50 percent...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification
system. The new system would be purchased today for 16,200 dollars.
It would be depreciated straight-line to 2,000 dollars over 2
years. In 2 years, the system would be sold and the after-tax cash
flow from capital spending in year 2 would be 2,900 dollars. The
system is expected to reduce costs by 4,500 dollars in year 1 and
by 12,200 dollars in year 2. If the tax rate is 50 percent...
As a policy Dabsbenzy Company Ltd. uses the straight – line method of depreciation to depreciate...
As a policy Dabsbenzy Company Ltd. uses the straight –
line method of depreciation to
depreciate its fixed assets. It is also a policy of the company to
apportion depreciation in relation
to the number of months the asset is put to use. The company
commenced operations on 1st
January 2014.On 1st January, 2014, the company bought a motor
vehicle with a registration
number AD 11 for GH¢55,000. This was the only motor vehicle which
was used in the business...
Suppose that under straight-line depreciation, a corporation would be allowed to depreciate a $10,000 asset over...
Suppose that under straight-line depreciation, a corporation
would be allowed to depreciate a $10,000 asset over 4 years. Under
accelerated depreciation, the corporation would be allowed to
depreciate 75% of the asset's value immediately in the first year
and the remaining 25% in the second year. Assume that the discount
rate is 10%.
(a) Suppose that the corporation normally makes $56,000 of
annual profit on which it pays a 35% tax every year. What is the
present discounted value of...
Suppose that under straight-line depreciation, a corporation would be allowed to depreciate a $10,000 asset over...
Suppose that under straight-line depreciation, a corporation
would be allowed to depreciate a $10,000 asset over 4 years. Under
accelerated depreciation, the corporation would be allowed to
depreciate 75% of the asset's value immediately in the first year
and the remaining 25% in the second year. Assume that the discount
rate is 10%.
(a) Suppose that the corporation normally makes $56,000 of annual
profit on which it pays a 35% tax every year. What is the present
discounted value of...
The new equipment will cost $7,500. And it would be depreciated on a straight-line basis over...
The new equipment will cost $7,500. And it would be depreciated
on a straight-line basis over the project's 5-year life
(depreciation rate is 20% per year) and would require additional
$200 net operating working capital that would be recovered at the
end of the project's life. There is no salvage value.
After purchasing this equipment, firm could sell 1000 products
per year at $6 per one. And operating costs is 50% of sale revenue.
Tax rate is 40% and Weighted...
The new equipment will cost $400,000. It would be depreciated to zero using straight-line depreciation over...
The new equipment will cost $400,000. It would be depreciated to
zero using straight-line depreciation over a 5-year period. The
estimated salvage value is $100,000 at the end of the project. The
initial requirement in net working capital is $55,000, all of which
will be recouped at the end of the project. The projected operating
cash flows are $155,500 per year. The tax rate is 30%. What is the
internal rate of return on this 5-year project? Group of answer...
A company purchased a building at the beginning of the year for $200,000 and is using straight-line depreciation to depreciate it over 20 years.
A company purchased a building at the beginning of the year for $200,000 and is using straight-line depreciation to depreciate it over 20 years. The salvage value of the building is $50,000. Prepare the adjusting entry to record the depreciation expense for the current year.
DEBIT: Accumulated Depreciation for $5,000; CREDIT: Depreciation Expense for $5,000
DEBIT: Accumulated Depreciation for $7,500; CREDIT: Depreciation Expense for $7,500
DEBIT: Depreciation Expense for $5,000; CREDIT: Accumulated Depreciation for $5,000
DEBIT: Depreciation Expense for...
A company is planning an investment of 5,000,000 today. The investment is depreciated on a straight-line...
A company is planning an investment of 5,000,000
today.
The investment is depreciated on a straight-line basis over the
life of 5 years and the residual value at the end of the project is
assumed to be 500,000.
The investment will generate the following income over the next
five years: 4,000,000, 4,500,000, 5,000,000, 5,500,000 and
6,000,000.
Payable operating expenses (operating expenses excluding
depreciation) will amount to 60% of the income in the individual
year.
The annual working capital requirement is...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 1. Creep is one of deformation that occurred in concrete structure. Give one example that can...
- Why does a particular codon represent only one specific amino acid?
- Write a function template sort that takes two references to generic objects and switches them if...
- What 2 things happen to the melting point of a solid when an impurity is present?
- How Can Hominin Evolution be characterized as " mosaic evolution" Use examples of species from the...
- Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
- Mobile and wireless devices are being increasingly used in the Business Administration and Management Industry. write...
ADVERTISEMENT