Question: 26A corporation uses net present value techniques in evaluating its capital investment projects. The company is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at the end of its five-year productive life. The corporation will depreciate the equipment on a straight-line basis for both financial and tax purposes. The corporation estimates $70,000 in annual recurring operating cash income and $20,000 in annual recurring operating cash expenses. The corporation's desired rate of return is 12% and its effective income tax rate is 40%. What is the net present value of this investment on an after-tax basis?
| A. |
$8,150 |
| B. |
$28,840 |
| C. |
$80,250 |
| D. |
$36,99 |
why here in the answer he take into account the depreciation , i know when i get the present value of cash from operation we not consider the depreciation cause it is non cash expense
| 36,990 |
| Answer (D) is correct. Annual cash outflow for taxes is $12,000 {[$70,000 inflows – $20,000 cash operating expenses – ($100,000 ÷ 5) depreciation] × 40%}. The annual net cash inflow is therefore $38,000 ($70,000 – $20,000 – $12,000). The present value of these net inflows for a 5-year period is $136,990 ($38,000 × 3.605 present value of an ordinary annuity for 5 years at 12%), and the NPV of the investment is $36,990 ($136,990 – $100,000 investment) |
i need to get it
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Sameh Mahmoud Ismail
Accountant
Giza
Egypt
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