A company is considering purchasing an asset for $65,000 that would have a usefu
ID: 2373045 • Letter: A
Question
A company is considering purchasing an asset for $65,000 that would have a useful life of 10 years and would have a salvage value of $5,000. For tax purposes, the entire original cost of the asset would be depreciated over 10 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $41,000 throughout its useful life. The project would require additional working capital of $8,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 13%.
Required:
What is the net present value of the asset?
Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
Explanation / Answer
1 Years
Amount
Tax Effect
After-Tax Cash Flows
13% Factor
Present Value
Cost of asset ..................................................................................................
Now
$(65,000)
$(65,000)
1.000
$(65,000)
Working capital needed.................................................................................
Now
( 8,000)
( 8,000)
1.000
( 8,000)
Net annual cash inflows ................................................................................
1-10
41,000
0.60
24,600
5.426
133479.6
Depreciation tax shield ..................................................................................
1-10
6,500
0.40
2,600
5.426
14,107.6
Working capital released ...............................................................................
10
8,000
8,000
0.295
2,360
Net present value
$ 76947.2
1 Years
Amount
Tax Effect
After-Tax Cash Flows
13% Factor
Present Value
Cost of asset ..................................................................................................
Now
$(65,000)
$(65,000)
1.000
$(65,000)
Working capital needed.................................................................................
Now
( 8,000)
( 8,000)
1.000
( 8,000)
Net annual cash inflows ................................................................................
1-10
41,000
0.60
24,600
5.426
133479.6
Depreciation tax shield ..................................................................................
1-10
6,500
0.40
2,600
5.426
14,107.6
Working capital released ...............................................................................
10
8,000
8,000
0.295
2,360
Net present value
$ 76947.2
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