Question

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 9,000 design hours per year; an operating cost savings of $45 per hour. The annual cash expenditures of operating the CAD system are estimated to be $200,000. The CAD system requires an initial investment of $550,000. The estimated life of this system is five years with no salvage value. The tax rate is 35 percent. United Technologies has a cost of capital of 14 percent.

Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any under depreciated balance) starting in Year 4.

Answer 1

Summary of the answer

Net cash flow of the project : $ 171,750

NPV : $ 39446
flows * NPV = PV of all future cash I Less Inutial investment * PV of future Cash flows = future Value (1 + rate) no. of periodo * Net cash flows of the project = (9000* $ 45= $ 405000 (operating cost savings) - $200,000 (annual cash Capenditure ) = $ 205000 - $110,000 = $45000 - ( $95000 X 35). - 33250) = $61750 + $ 110,000 (note) - $ 171, 750 * Deporuciaron = $ 550,000 - $110,000 per year added back to the after tax figure as it Note: Depreciation will lee ug non cash charge 0.877 NPV of project wing cost of capital 14% pv@142 cash flows (550,00) ( 550,000) 150625 1171750 132076 171750 0.769 0-675 115931 171750 0.592 101676 171750 89138 171750 39446 0.519
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