1a.
Year | Reduction in Costs | Annual Expenses | Net Savings | PV Factor @9% | PV |
1 | $ 60,000 | $ 31,500 | $ 28,500 | 0.9174 | $ 26,146 |
2 | $ 60,000 | $ 31,500 | $ 28,500 | 0.8417 | $ 23,988 |
3 | $ 60,000 | $ 31,500 | $ 28,500 | 0.7722 | $ 22,008 |
4 | $ 60,000 | $ 31,500 | $ 28,500 | 0.7084 | $ 20,189 |
Total PV | $ 92,331 | ||||
Less : Investment | $ 56,000 | ||||
NPV | $ 36,331 |
1b.
Year | Reduction in Costs | Annual Expenses | Net Savings | Depreciation | Taxable Income | Tax | After Tax net cash flows | PV Factor @9% | PV |
1 | $ 60,000 | $ 31,500 | $ 28,500 | $ 14,000 | $ 14,500 | $ 3,480 | $ 25,020 | 0.9174 | $ 22,953 |
2 | $ 60,000 | $ 31,500 | $ 28,500 | $ 14,000 | $ 14,500 | $ 3,480 | $ 25,020 | 0.8417 | $ 21,059 |
3 | $ 60,000 | $ 31,500 | $ 28,500 | $ 14,000 | $ 14,500 | $ 3,480 | $ 25,020 | 0.7722 | $ 19,320 |
4 | $ 60,000 | $ 31,500 | $ 28,500 | $ 14,000 | $ 14,500 | $ 3,480 | $ 25,020 | 0.7084 | $ 17,724 |
Total PV | $ 81,057 | ||||||||
Less : Investment | $ 56,000 | ||||||||
NPV | $ 25,057 |
Depreciation = $56000/4 = $14000
Depreciation tax shield = Depreciation x 24%
1c.
Year | Reduction in Costs | Annual Expenses | Net Savings | Depreciation | Taxable Income | Tax | After Tax net cash flows | PV Factor @9% | PV |
1 | $ 60,000 | $ 31,500 | $ 28,500 | $ 28,000 | $ 500 | $ 120 | $ 28,380 | 0.9174 | $ 26,036 |
2 | $ 60,000 | $ 31,500 | $ 28,500 | $ 14,000 | $ 14,500 | $ 3,480 | $ 25,020 | 0.8417 | $ 21,059 |
3 | $ 60,000 | $ 31,500 | $ 28,500 | $ 7,000 | $ 21,500 | $ 5,160 | $ 23,340 | 0.7722 | $ 18,023 |
4 | $ 60,000 | $ 31,500 | $ 28,500 | $ 7,000 | $ 21,500 | $ 5,160 | $ 23,340 | 0.7084 | $ 16,534 |
Total PV | $ 81,652 | ||||||||
Less : Investment | $ 56,000 | ||||||||
NPV | $ 25,652 |
DDB Depreciation = Beginning Book Value x 50%
2a.
Year | Net Cash Flows |
0 | $ -56,000 |
1 | $ 28,500 |
2 | $ 28,500 |
3 | $ 28,500 |
4 | $ 28,500 |
IRR | 36.03% |
IRR | =IRR(B2:B6,10%) |
2b.
Year | Net Cash Flows |
0 | $ -56,000 |
1 | $ 25,020 |
2 | $ 25,020 |
3 | $ 25,020 |
4 | $ 25,020 |
IRR | 28.07% |
IRR | =IRR(B2:B6,10%) |
2c.
Year | Net Cash Flows |
0 | $ -56,000 |
1 | $ 28,380 |
2 | $ 25,020 |
3 | $ 23,340 |
4 | $ 23,340 |
IRR | 29.37% |
IRR | =IRR(B2:B6,10%) |
eEgg is considering the purchase of a new distributed network computer system to help handle its...
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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $40,000 to purchase and install and $29,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $50,000 per year. The firm’s cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment...
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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $40,000 to purchase and install and $29,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $50,000 per year. The firm's cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment...
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