The management of Iroquois National Bank is considering an investment in automat
ID: 2456663 • Letter: T
Question
The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $153,600 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $32,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.
Compute the net present value of the proposed investment assuming an after-tax hurdle rate of: (a) 10 percent, (b) 12 percent, and (c) 14 percent. (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar amount.)
The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $153,600 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $32,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.
Explanation / Answer
Year Cash Flow Cumulative 0 -153600 -153600 1 32000 -121600 2 32000 -89600 3 32000 -57600 4 32000 -25600 5 32000 6400 6 32000 38400 7 32000 70400 Payback period = 4+25600/32000 Payback Period = 4.8 years NPV Discount Net Year 0 -153600 1 -153600 1 32000 0.909091 29090.91 2 32000 0.826446 26446.28 3 32000 0.751315 24042.07 4 32000 0.683013 21856.43 5 32000 0.620921 19869.48 6 32000 0.564474 18063.17 7 32000 0.513158 16421.06 NPV 2189.402 NPV 12% Discount Net Year 0 -153600 1 -153600 1 32000 0.892857 28571.43 2 32000 0.797194 25510.2 3 32000 0.71178 22776.97 4 32000 0.635518 20336.58 5 32000 0.567427 18157.66 6 32000 0.506631 16212.2 7 32000 0.452349 14475.17 NPV -7559.79 14% NPV Discount Net Year 0 -153600 1 -153600 1 32000 0.877193 28070.18 2 32000 0.769468 24622.96 3 32000 0.674972 21599.09 4 32000 0.59208 18946.57 5 32000 0.519369 16619.8 6 32000 0.455587 14578.77 7 32000 0.399637 12788.39 NPV -16374.2
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