of a new tunneling X-ray microscope for $200,000. The net benefits from gains in
ID: 2803593 • Letter: O
Question
of a new tunneling X-ray microscope for $200,000. The net benefits from gains in materials engineering is projected to be $40,000 in real dollars at the end of the first year increasing by an arithmetic gradient of $10,000 per year in real dollars for the first 5 year life of the X-ray and leveling off at $80,000 per year in years 6 and 7The unit will be depreciated under MACRS. Due to increasing advances in tunneling X-ray microscope technology, the unit will have SO salvage value at the end of its 7 year life. During the year analysis period, inflation is expected to be at 40% per year. The corporation has a combined state and federal 40% income tax rate. The corporation requires a 20% after-tax market rate of return on its research and development investments. Should the X-ray unit be purchased?Explanation / Answer
The Project can be decided using Net Present Value
Step 1
The rate of Inflation is involved hence the solution can be done in two ways Nominal Cash flow method or Real Cash Flow method.
Nominal cash flow method means The inflation rate rate is to be adjusted every year like a Future value rate
Real cash flow method means the discounting rate is adjusted at a single using a formula
[(1+Nominal Discount rate)/(1+Inflation rate)]-1
=[(1+0.20)/(1+.04)]-1
=1.1538-1
=0.1538=15.38%
Step 2
Calculation of Discounted Cash FLows
Net Present Value=Discounted Cash Inflows-Cash Outflows
=$198939.4-$200000
=-$1060.57
SInce the NPV of the machine is negative the purchase of X-Ray machine should not be accepted
Note Depreciation Schedule
Note
The values are rounded offf to 2 decimals
Year 1 2 3 4 5 6 7 Cash Inflows 40000 50000 60000 70000 80000 80000 80000 Less: Depreciation 28572 28572 28572 28571 28571 28571 28571 Income Before Taxes 11428 21428 31428 41429 51429 51429 51429 Taxes @40% 4571.2 8571.2 12571.2 16571.6 20571.6 20571.6 20571.6 Income After Taxes 6856.8 12856.8 18856.8 24857.4 30857.4 30857.4 30857.4 Add:Depreciation 28572 28572 28572 28571 28571 28571 28571 After Tax Cash Flows 35428.8 41428.8 47428.8 53428.4 59428.4 59428.4 59428.4 Dicounting @15.38% 0.8667 0.7512 0.651 0.5643 0.489 0.4239 0.3674 Present Value of Cash Flows 30706.14 31121.31 30876.15 30149.65 29060.49 25191.7 21833.99 Total 198939.4Related Questions
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