Question

e Egg 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 under each of the following independent situations? Use the appropriate present value factors from Appendix . TABLE 1 and Appendix. TABLE 21 1a. The firm is not yet profitable and therefore pays no income taxes 15. The firm is in the 2796 income tax bracket and uses straight-line (SLNI depreciation with no salvage value. Assume MACRS rule do not apply. 1. The firm is in the 27% Income tax bracket and uses double-declining-balance (DB) depreciation with no salvage value. Givena fouear fe the DDB depreciation rate is 50% fle, 2 2596)In year four record depreciation expense as the netbook van the asset at the start of the year. 2. What is the Internal rate of return (IRR) of the proposed investment for situations in requirement parts (a) through ( Use the IRR built-in function in Excel to compute the IRR. ces Complete this question by entering your answers in the tabs below Res 12 Reg 18 Res 10 Res 2 The firm is not yet profitable and therefore pays no income taxes. (Found your answer to nearest whole dollar amount.) Net est

Answer 1

Answer with working is given below

Annual cost savings $50,000 $29,000 $21,000 1.a) Less: Cost of Operation Annual Cash inflow PV Factor for 9% for 4 years 3.2397 Present value of cash inflow $68,034 $40,000 Less :Initial Investment $28,034 Net Present Value $50,000 $29,000 $10,000 $11,000 $2,970 $8,030 $10,000 $18,030 Annual cost savings Less: Cost of Operation Less: Depreciation Net Taxable Income 1.b) Less: Tax at 27% Profit after Tax Add :Depreciation Annual Cash inflow PV Factor for 9% for 4 years 3.2397 Present value of cash inflow Less:Initial Investment $58,412 $40,000 $18,412 Net Present Value 1.c) Year 1 Year 2 Total Year 3 Year 4 $50,000 $29,000 Annual cost savings Annual operation cost Depreciation Net Taxable Income $50,000 $50,000 $50,000 $29,000 $29,000 $29,000 $10,000 $20,000 $5,000 $5,000 $1,000 $11,000 $2,970 $8,030 $10,000 $16,000 $16,000 Tax at 27% $4,320 $270 $4,320 $730 $11,680 $5,000 $16,680 Income After tax Add: Depreciation $11,680 $20,000 $5,000 Annual Cash inflow $20,730 0.9174 $19,018 $18,030 $16,680 0.7084 $11,817 PV factor at 9% 0.8417 0.7722 PV of cash inflow Less: Initial Investment $12,880 $58,890 $40,000 $18,890 $15,175 Net Present Value Double Declining balance method Net Book Depreciation Opening Depreciation Value (Year Year Balance Rate end) $20,000 $10,000 $5,000 $0 $20,000 $10,000 $5,000 $5,000 $40,000 50% Year 1 $20,000 50% Year 2 $10,000 50% Year 3 $5,000 Year 4 Internal rate of return (IRR) 2 SLM with tax DDB with tax -$40,000 Cash Flow SLM Cash Outflow -$40,000 -$40,000 Year 0 Cash Inflow $21,000 $18,030 $20,730 Year 1 $18,030 $16,680 Year 2 Cash Inflow $21,000 $18,030 Cash Inflow $21,000 $18,030 Year 3 Cash Inflow $18,030 Year 4 $21,000 $16,680 Internal Rate of return 38.0% 30.1% 28.6% In IRR Net present value of cash outflow Net present value of cash inflow