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Payback Period and NPV: Taxes and Straight-Line Depreciation Assume that United Technologies is evaluating a proposal...
Payback Period and NPV:
Taxes and Straight-Line Depreciation
Assume that United Technologies is evaluating a proposal to change
the company's manual design system to a computer-aided design (CAD)
system. The proposed system is expected to save 10,000 design hours
per year; an operating cost savings of $40 per hour. The annual
cash expenditures of operating the CAD system are estimated to be
$200,000. The CAD system requires an initial investment of
$500,000. The estimated life of this system is five years with no
salvage value. The tax rate is 35 percent, and United Technologies
uses straight-line depreciation for tax purposes. United
Technologies has a cost of capital of 20 percent.
(a) Compute the annual after-tax cash flows related to the CAD
project.
$ Answer
(b) Compute each of the following for the project:
1. Payback period. (Round your answer to two decimal places.)
Answer years
2. Net present value. (Round answer to the nearest whole number.
Use a negative sign with your answer if appropriate.)
$ Answer
need right answers please
Solutions
Expert Solution
| Answer: | |||
| Requirement (a) | Compute the annual after-tax cash flows related to the CAD project. | ||
| Saving in revenue | $ 400,000.00 | ||
| Less: | Annual expenditure | $ 200,000.00 | |
| Less: | Depreciation | $ 100,000.00 | (500,000/5 years) |
| Profit before tax | $ 100,000.00 | ||
| Less: Tax@ 35% | $ 35,000.00 | ||
| Profit after tax | $ 65,000.00 | ||
| Add: | Depreciation | $ 100,000.00 | |
| After-tax cash flow | $ 165,000.00 | ||
| Requirement (b) (1) | Pay back period | =Initial Investment/ Annual after-tax cash flow | |
| =$500,000/165,000 | |||
| 3.03 | years | ||
| Requirement (b) (2) | Net present value | $ (6,549.00) | |
| 1 | 2 | 3=1*2 | |
| Year | Cash flow | Discount @ 20% | Present value |
| 0 | $ (500,000.00) | 1 | $ (500,000.00) |
| 1 | $ 165,000.00 | 0.833333333 | $ 137,500.00 |
| 2 | $ 165,000.00 | 0.694444444 | $ 114,583.33 |
| 3 | $ 165,000.00 | 0.578703704 | $ 95,486.11 |
| 4 | $ 165,000.00 | 0.482253086 | $ 79,571.76 |
| 5 | $ 165,000.00 | 0.401877572 | $ 66,309.80 |
| Net present value | $ (6,549.00) | ||
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