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Cookies R Us Incorporated is evaluating a new cookie cutting machine that will cost $500,000. The...

Cookies R Us Incorporated is evaluating a new cookie cutting machine that will cost $500,000. The machine can be depreciated on a straight-line basis to zero over 10 years. It will provide the company with annual before-tax savings of $135,000. The marginal corporate tax rate is 40% and the required rate of return is 15%. What is the net present value of this cost-cutting asset?

Multiple Choice

  • $128,611.12

  • $157,458.69

  • -$193,855.11

  • $6,895.63

  • $277,909.14

Solutions

Expert Solution

$6,895.63

Step-1:Calculation of annual cash flows
Annual before tax saving (a) 1,35,000.00
Depreciation (b)      50,000.00
Profit before tax(c=a-b)      85,000.00
Tax Expense (d=c*40%)      34,000.00
Net Income (e=c-d)      51,000.00
Depreciation (b)      50,000.00
Annual cash flow (e+b) 1,01,000.00
Working:
Annual depreciation = (Cost - Salvage Value)/Useful Life
= (500000-0)/10
= $        50,000
Step-2:Calculation of net present value
Present Value of annual cash flow $ 5,06,895.63
Cost of Machine $ 5,00,000.00
Net Present Value $       6,895.63
Working:
Present Value of annual cash flow =-pv(rate,nper,pmt,fv) Where,
= $ 5,06,895.63 rate = 15%
nper = 10
pmt = 1,01,000.00
fv = 0

jeff jeffy answered 1 year ago
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