A company is considering a 3-year project with an initial cost of $960,000. The

Question

A company is considering a 3-year project with an initial cost of $960,000. The project will not directly produce any sales but will reduce operating costs by $500,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $143,000. The tax rate is 34 percent. The project will require $26,000 in extra inventory for spare parts and accessories. Should this project be implemented if its requires a rate of return of 14 percent? Why or why not?

A. no; the NPV is $139,985.20

B. yes; The NPV is $130,957.13

C. yes;  The NPV is $113,985.2

D. no.  The NPV is -$112,285.2

A company is considering a 3-year project with an initial cost of $960,000. The project will not directly produce any sales but will reduce operating costs by $500,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $143,000. The tax rate is 34 percent. The project will require $26,000 in extra inventory for spare parts and accessories. Should this project be implemented if its requires a rate of return of 14 percent? Why or why not? no; the NPV is $139,985.20 yes; The NPV is $130,957.13 yes; The NPV is $113,985.2 no. The NPV is -$112,285.2

Explanation / Answer

A company is considering a 3-year project with an initial cost of $960,000. The project will not directly produce any sales but will reduce operating costs by $500,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $143,000. The tax rate is 34 percent. The project will require $26,000 in extra inventory for spare parts and accessories. Should this project be implemented if its requires a rate of return of 14 percent? Why or why not?

Annual depreciation = 960000/3 = 320000

Intial Investment = 960000 + 26000 = 986000

Annual cash flow = 500000*0.66 + 320000*0.34 =438800

After tax salvage value = 143000*0.66 = 94380

Terminal cash flow = 94380 + 26000 = 120380

NPV = -986000 + 438800/1.14 + 438800/1.14^2 + 438800/1.14^3 + 120380/1.14^3

NPV =$ 113985.20

C. yes; The NPV is $113,985.2

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.