Morgado Inc. has provided the following data to be used in evaluating a proposed

Question

Morgado Inc. has provided the following data to be used in evaluating a proposed investment project:

Initial investment    $130,000

Annual cash receipts    $78,000

Life of the project   6 years

Annual cash expenses    $43,000

Salvage value $13,000

The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%.

1. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $39,000 B. $13,650 C. $54,600 D. $23,400

2. When computing the net present value of the project, what are the annual after-tax cash expenses? A. $12,900 B. $30,100 C. $55,900 D. $30,000

3. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken? A. $6,500 B. $15,167 C. $18,200 D. $7,800

4. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $9,100 B. $3,900 C. $13,000 D. $0

Explanation / Answer

1. after-tax cash receipts=78000*(1-0.30)=54600

2. after-tax cash expenses=43000*(1-0.30)=30100

3. depreciation= 130000/5=26000
depreciation deduction which reduce tax=26000*(1-0.30)=18200

4. After tax salvage value=13000*(1-0.30)=9100

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