Ryan Company is considering whether to invest in a piece of equipment that requi

Question

Ryan Company is considering whether to invest in a piece of equipment that requires an investment of $240,000 today. The project will provide net before-tax operating cash inflows of $70,000 at the end of each year for six years, and it will have a salvage value of $0 at the end of six years. Ryan Company uses straight-line depreciation for income tax purposes. The income tax rate is 30% and the discount rate is 14%. Calculate the net present value of the piece of equipment. Don’t forget income taxes!!!

Explanation / Answer

Statement showing NPV of the project

Particulars Time Amount PVF PV Cash outflows Purchase of equipment 0 240000 1 240000 P.V of cash outflows (A) 240000 Cash inflows Operating cash flowsv(70000 x 65%) 45500 1-6 3.8887 176935.85 Tax saving on depreciation (240000/6 x 35%) 14000 1-6 3.8887 54441.8 P.V of cash inflows (B) 231377.65 NPV (B -A) (8622.35)

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