Question

In: Finance

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase...

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $1,800 and sell its old washer for $600. The new washer will last for 6 years and save $500 a year in expenses. The opportunity cost of capital is 19%, and the firm’s tax rate is 21%.

a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)

b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Solutions

Expert Solution

Ans A-Cash Flow Refers to the actual outflow or inflow of cash.In our 1st case deperication is an Non Cash Items thats why deperciation expenses is again added in Profit after Tax.

Ans B-NPV refers to the Net present value of all current and future payment and receipt.

Ans C- Deperication is allowed as 100% deduction immediately so Tax Benefit on same year will be received which is saving in actual cash outflow and thats why reduce from cash flow of 0 Year.


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