Exercise 9-13 Great Northern Fishing Company is contemplating the purchase of a

Question

Exercise 9-13 Great Northern Fishing Company is contemplating the purchase of a new smoker. The smoker will cost $60,600 but will generate additional revenue of $34,100 per year for 6 years. Additional costs, other than depreciation, will equal $10,800 per year. The smoker has an expected life of 6 years, at which time it will have no residual value. Great Northern uses the straight-line method of depreciation for tax purposes. Determine the net present value of the investment if the required rate of return is 13 percent and the tax rate is 30 percent. Should Great Northern make the investment in the smoker?

Explanation / Answer

DEPRECIATION PER YEAR = 60600/6 = 10100

CASHFLOW EACH YEAR = (34100-10800-10100)*0.7 + 10100

=19340

NPV = 19340*PVIFA(13%,6) - 60600

=19340*4 - 60600

=16760

ACCEPT THE PROJECT AS NPV IS POSITIVE

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.