Question 1: Real Investment Decisions (10 points) Hansen Investors, Inc. is cons
ID: 2411269 • Letter: Q
Question
Question 1: Real Investment Decisions (10 points) Hansen Investors, Inc. is considering the purchase of a S400,000 super computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be S60,000 in five years. The computer will replace five office employees whose combined annual salaries are $100,000. The machine will also immediately lower the firm's required net working capital by $50,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 35 percent. Is it worthwhile to buy the computer if the appropriate discount rate is 10 percent?Explanation / Answer
Answers
N
Year
0
1
2
3
4
5
A
The Initial investment
($400,000)
B
The Before tax annual savings
$100,000
$100,000
$100,000
$100,000
$100,000
C=B*(1-0.35)
The After tax annual savings
$65,000
$65,000
$65,000
$65,000
$65,000
D=400000/5
The Annual Depreciation
$ 80,000
$ 80,000
$ 80,000
$ 80,000
$ 80,000
E=D*0.35
The Depreciation tax shield
$ 28,000
$ 28,000
$ 28,000
$ 28,000
$ 28,000
F
Cash flow due to decrease/(Increase) in working capital
$50,000
($50,000)
G
The Before tax salvage value
$60,000
H=G*(1-0.35)
The After Tax salvage value
$39,000
I=A+C+E+F+H
Net after tax annual cash flow
($350,000)
$93,000.00
$93,000.00
$93,000.00
$93,000.00
$82,000
SUM
PV=I/(1.1^N)
Present Value (PV) of net after tax cash flow
-350000
84545.45455
76859.50413
69872.2765
63520.25135
50915.5485
-4286.96
Sum of PV of Cash Flow
$ (4,286.96)
Net Present Value (NPV)
$ (4,286.96)
Since NPV is negative, it is not worthwhile to buy the computer
N
Year
0
1
2
3
4
5
A
The Initial investment
($400,000)
B
The Before tax annual savings
$100,000
$100,000
$100,000
$100,000
$100,000
C=B*(1-0.35)
The After tax annual savings
$65,000
$65,000
$65,000
$65,000
$65,000
D=400000/5
The Annual Depreciation
$ 80,000
$ 80,000
$ 80,000
$ 80,000
$ 80,000
E=D*0.35
The Depreciation tax shield
$ 28,000
$ 28,000
$ 28,000
$ 28,000
$ 28,000
F
Cash flow due to decrease/(Increase) in working capital
$50,000
($50,000)
G
The Before tax salvage value
$60,000
H=G*(1-0.35)
The After Tax salvage value
$39,000
I=A+C+E+F+H
Net after tax annual cash flow
($350,000)
$93,000.00
$93,000.00
$93,000.00
$93,000.00
$82,000
SUM
PV=I/(1.1^N)
Present Value (PV) of net after tax cash flow
-350000
84545.45455
76859.50413
69872.2765
63520.25135
50915.5485
-4286.96
Sum of PV of Cash Flow
$ (4,286.96)
Net Present Value (NPV)
$ (4,286.96)
Since NPV is negative, it is not worthwhile to buy the computer
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