NPV: Taxes and Accelerated Depreciation Assume that United Technologies is evalu
ID: 2478489 • Letter: N
Question
NPV: Taxes and Accelerated Depreciation Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 9,000 design hours per year; an operating cost savings of $45 per hour. The annual cash expenditures of operating the CAD system are estimated to be $200,000. The CAD system requires an initial investment of $550,000. The estimated life of this system is five years with no salvage value. The tax rate is 35 percent, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of 14 percent.. Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any under depreciated balance) starting in Year 4. Determine the project's net present value. Round your answer to the nearest dollar. $Answer 52,368 Check
Explanation / Answer
$52,369
There is a difference of $1 due to rounding off.
Saving hours 9,000 Year Depriciation Expe Book Value Operating cost - per hour $45 1 $2,20,000 $3,30,000 Total saving in cost $4,05,000 2 $1,32,000 $1,98,000 Less: Operating cost $2,00,000 3 $79,200 $1,18,800 Net savings before tax $2,05,000 4 $59,400 Less: Tax at 35% $71,750 5 $59,400 Net savings after tax $1,33,250 Year Cash flow Depreciation Expense Tax on Depreciation Total Cash Flows PV factor Present Value 0 -$5,50,000 $0 $0 -$5,50,000 1.00000 -$5,50,000 1 $1,33,250 $2,20,000 $77,000 $2,10,250 0.87719 $1,84,430 2 $1,33,250 $1,32,000 $46,200 $1,79,450 0.76947 $1,38,081 3 $1,33,250 $79,200 $27,720 $1,60,970 0.67497 $1,08,650 4 $1,33,250 $59,400 $20,790 $1,54,040 0.59208 $91,204 5 $1,33,250 $59,400 $20,790 $1,54,040 0.51937 $80,004 Net Present Value$52,369
There is a difference of $1 due to rounding off.
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