Question

In: Finance

if our company can purchase new technology for 650,000 and that technology will save us 330,000...

if our company can purchase new technology for 650,000 and that technology will save us 330,000 for three years at which time the new technology will be outdated and our tax rate is 35% should we buy the technology when our cost of capital is 9%

Solutions

Expert Solution

We can decide whether to buy the technology or not using the NPV approach.

NPV is the difference between the present value of the cash inflows and the present value of cash outflows

we need to calculate the after tax savings on the technology to calculate the NPV

Years Savings Taxes on savings After tax savings Discounting factor Present value
1 330000 115500 214500 0.917431193         196,788.99
2 330000 115500 214500 0.841679993         180,540.36
3 330000 115500 214500 0.77218348         165,633.36
Total         542,962.71
Less : Cash outflows         650,000.00
NPV      (107,037.29)

NPV is negative hence we should not buy the technology.

Discounting factor = 1 / ( 1 + r) ^n where r is the cost of capital and n is the no years from year 0.

jeff jeffy answered 1 year ago
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