Gemini, LLC, invested $1 million in a state-of-the-art information system that p
ID: 2644157 • Letter: G
Question
Gemini, LLC, invested $1 million in a state-of-the-art information system that promises to reduce processing costs for its purchasing activities by $120,000 per year for the next 10 years. The company will scrap its old information system and will receive no money as a consequence. The new system will be depreciated over 10 years at a rate of $100,000 per year. Gemini's tax rate is 30 percent, and the company has a 7 percent after-tax cost of capital.
What is the after-tax net present value of Gemini's new information system? Use the time value of money charts as needed for your calculations. If required, use a minus sign to indicate a negative net present value. Do not round intermediate amounts. Round your final answer to two decimal places.
Explanation / Answer
Cost of the project = $1,000,000
Processing cost = Cash inflow = $120,000
Number of years = 10 years
Depreciation = $100,000
Tax rate = 30%
Cost of capital = 7%
Net cash inflow = Cash inflow - Tax + Depreciation
After-tax net present value of Gemini's new information system = $292,339.00
Year Cash inflow (A) Tax(B = A X 30%) After tax
(C = A - B) Depreciation
(D) Net Cash inflow (E = C + D) PV factor at 7% (F) Present value (G = E X F) 1 120,000 36,000 84,000 100,000 184,000 0.9345794 171,962.62 2 120,000 36,000 84,000 100,000 184,000 0.8734387 160,712.73 3 120,000 36,000 84,000 100,000 184,000 0.8162979 150,198.81 4 120,000 36,000 84,000 100,000 184,000 0.7628952 140,372.72 5 120,000 36,000 84,000 100,000 184,000 0.7129862 131,189.46 6 120,000 36,000 84,000 100,000 184,000 0.6663422 122,606.97 7 120,000 36,000 84,000 100,000 184,000 0.6227497 114,585.95 8 120,000 36,000 84,000 100,000 184,000 0.5820091 107,089.68 9 120,000 36,000 84,000 100,000 184,000 0.5439337 100,083.81 10 120,000 36,000 84,000 100,000 184,000 0.5083493 93,536.27 Total 1,292,339.00 Less: Outflow 1,000,000.00 NPV 292,339.00
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