Antonio Melton, the chief executive officer of Munoz Corporation, has assembled

Question

Antonio Melton, the chief executive officer of Munoz Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $415,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following: Year 3 Year 1 $92,000 $104,000 $128,000 $192,000 Year 2 Year 4 Mr. Melton agrees with his advisers that the company should use the discount rate (required rate of return) of 14 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.) b.&c.; Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $83,000 per year for the four-year period. The company's income tax rate is 30 percent per year. Use this information to revise the company's expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the project? (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.) a. Net present value Should Mr. Melton approve the project? b.&c.; Net present value Should Mr. Melton approve the project?

Explanation / Answer

a Net Present value -54197.9 Reject b&c Net Present value -89887.1 Reject a Net Present value Cash flows Year 0 Year1 Year2 Year3 Year4 Cash Outflow -415000 Cash Inflow 92000 104000 128000 192000 Dicountin factor@14% 1 0.88 0.77 0.67 0.59 Dicsounted Cashflows -415000 80701.75 80024.62 86396.35 113679.4 Discounted Cash Inflows 360802.1 Cash Out flows -415000 Net Present Value -54197.9 b&c Year 0 Year1 Year2 Year3 Year4 Cash Inflow 92000 104000 128000 192000 Less Depreciation 83000 83000 83000 83000 PBT 9000 21000 45000 109000 Taxes@30% 2700 6300 13500 32700 PAT 6300 14700 31500 76300 Add Depreciation 83000 83000 83000 83000 Operating cash Inflows 89300 97700 114500 159300 Cash Outflows -415000 Dicountin factor@14% 1.00 0.88 0.77 0.67 0.59 Dicsounted Cashflows -415000 78333.33 75176.98 77284.24 94318.39 Discounted Cash Inflows 325112.9 Cash Out flows -415000 Net Present Value -89887.1

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