fm12 6 - $15,000 $15,000 $15,000 Depreciation shield 11,220...

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d. The project has an NPV of $10,841; thus, it should be accepted. Year Net Cash Flow PV @ 12% 0 ($126,000) ($126,000) 1 42,518 37,963 2 47,579 37,930 3 85,628 60,948 NPV = $ 10,841 Alternatively, place the cash flows on a time line: 0 1 2 3 | | | | 12% -126,000 42,518 47,579 34,926 50,702 85,628 With a financial calculator, input the appropriate cash flows into the cash flow register, input I = 12, and then solve for NPV = $10,841. 12-5 a. The net cost is $89,000: Price ($70,000) Modification (15,000) Change in NWC (4,000 ) ($89,000 ) b. The operating cash flows follow: Year 1 Year 2 Year 3 After-tax savings
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Unformatted text preview: $15,000 $15,000 $15,000 Depreciation shield 11,220 15,300 5,100 Net cash flow $26,220 $30,300 $20,100 Notes: 1. The after-tax cost savings is $25,000(1 – T) = $25,000(0.6) = $15,000. 2. The depreciation expense in each year is the depreciable basis, $85,000, times the MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3, respectively. Depreciation expense in Years 1, 2, and 3 is $28,050, $38,250, and $12,750. The depreciation shield is calculated as the tax rate (40%) times the depreciation expense in each year. Answers and Solutions: 12 - 6...
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