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Unformatted text preview: The asset is sold at a loss to book value, so this creates a tax refund. After-tax salvage value = $80,000 + ($96,768 – 80,000)(0.35) = $85,868.8So, the OCF for each year will be: OCF1 = $210,000(1 – 0.35) + 0.35($112,000) = $172,700 OCF2 = $210,000(1 – 0.35) + 0.35($179,200) = $196,220 OCF3 = $210,000(1 – 0.35) + 0.35($107,520) = $171,132 OCF4 = $210,000(1 – 0.35) + 0.35($64,512) = $159,079.20 NPV = – $560,000 – 20,000 + ($172,700 – 3,000)/1.09 + ($196,220 – 3,000)/1.092 + ($171,132 – 3,000)/1.093 + ($159,079.20 + 29,000 + 85,868.80)/1.094 = $69,811.79Yes, the company should buy and install the machine press. 20. Dik .System A: Costs $430,000n = 4 years $110,000 in Pretax Annual Operating Costs. System B: Costs $570,000 n = 6 years $98,000 in Pretax Annual Operating CostsTax Rate 34%, Disc Rates 11% Depreciation use straight line method Dit. Which Project should firm choose! Ans: To decide between two projects should be chosen, we’ll use capital budgeting method to use is NPV. OCF = (Sales – Costs) x (1-tax) + Depreciation x Tax NPV = Costs – OCF NPV of Project A: OCFA = –$110,000(1 – 0.34) + 0.34($430,000/4) OCFA = –$36,050 NPVA = –$430,000 – $36,050(PVIFA11%,4) NPVA = –$541,843.17 NPV of Project B: OCFB = –$98,000(1 – 0.34) + 0.34($570,000/6) OCFB = –$32,380 NPVB = –$570,000 – $32,380(PVIFA11%,6) NPVB = –$706,984.82From calculation above, Dangerfield Industrial System should choose project A, because it has the more positive NPV....
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