Problem 10-17A Applying the net present value approach with and without tax cons
ID: 2531409 • Letter: P
Question
Problem 10-17A Applying the net present value approach with and without tax considerations LO 10-2 Antonio Melton, the chief executive officer of Rundle Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $411,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following Year 2 90,000 $106,000 $125,000 Year 4 $190,000 Year 1 Year 3 Mr. Melton agrees with his advisers that the company should use the discount rate (required rate of return) of 12 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tebles provided.) Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.) b.&c.; Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $82,200 per year for the four-year period. The company's income tax rate is 35 percent per year. Use this information to revise the company's expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the project? (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.) Net present value Should Mr. Melton approve the project? b.&c.; Net present value Should Mr. Melton approve the project?Explanation / Answer
Answer:
A
Net present Value
($36,416)
Should Mr. Melton approve the project
No
b&C
Net present Value
$50,970
Should Mr. Melton approve the project
Yes
Working notes for the above answer is as under
A)
Compute the net present value of the proposed project.
Project A
Initial Investment
$411,000
i =
12%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
90000
0.8929
=
80361
2
106000
0.7972
=
84503.2
3
125000
0.7118
=
88975
4
190000
0.6355
=
120745
Total
374584.2
Less:Initial Investment
($411,000)
NPV
($36,416)
NPV= (36,416) negative
Since they have negative NPV so project should not be accepted
__________________________________
B)
First of all we need to calculate depriciation tax shelter as under
DTS
=82,200*35%
=$28,770
Now we will calculate revised NPV as under
Project A
Initial Investment
$411,000
Chart Values are Based on:
i =
12%
Year
Cash Inflow
x
PV Factor
=
Present Value
(CF+DTS)
1
118770
0.8929
=
106049.733
2
134770
0.7972
=
107438.644
3
153770
0.7118
=
109453.486
4
218770
0.6355
=
139028.335
Total
461970.198
Less:Initial Investment
($411,000)
NPV
$50,970
Mr Melton should accept the project as NPV become Positive
NPV=$50,970
A
Net present Value
($36,416)
Should Mr. Melton approve the project
No
b&C
Net present Value
$50,970
Should Mr. Melton approve the project
Yes
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