Question

10 correct Mark 0.00 out of 100 p Page 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 10.000 design hours per year, an operating cost savings of $50 per hour. The annual cash expenditures of operating the CAD system are estimated to be $250,000. The CAD system requires an initial investment of $500,000. The estimated life of this system is five years with no Salvage value. The tax rate is 36 percent. United Technologies has a cost of capital of 20 percent Assume that management intends to use double-declining balance depreciation with a switch to straight line depreciation applied to any undeprecated balance Maring in Year 4 Determine the project's ret present value. Round your answer to the nearest dollar, $ 86,161 Check

Answer 1

We Know NPV = PV of cash inflows - intial investment Operating savings = 10000*$50/hour = $500000 Cash Expenditure = $250000 Depreciation (non cash expense) = Investment/Life = $500000/5 = $100000 Tax Rate = 36% Cost of capital = 20% Net Cash inflow = (Operating savings - Cash Expenditure - Depreciation) - Tax + Depreciation = ($500000 - $250000 - $100000) - (150000*36%) + 100000 = $196000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cashflow $ (500,000.00) $196,000 $196,000 $196,000 $196,000 $196,000 Dis.factor 0.8333 0.6944 0.5787 0.4823 0.4019 @20% Pv of cashflow $163,333.33 $136,102.40 $113,425.20 $94,530.80 $78,772.40 Less Pv of cashflows Initial outlay NPV $586,164.13 $ (500,000.00) $86,164.13 Approx