Question

Check my work eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 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 $58,000 per year. The firm's cost of capital (discount rate) is 11%. 0.25 points eBook References 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 C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 x 25%). In year four, record depreciation expense as the net book value (NBV) of 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 1, parts (a) through (c)? Use the IRR builit-in function in Excel to compute the IRR.

Answer 1

Part a: 1A) Net cash inflow each year $58,000-S32,000 $26,000*3.10 (PV at 11%n-4 ) 26.000 Present value of net cash inflows S 80,600 NPV 30,600 1B) Net cash inflow before depreciation Depreciation expense 26,000 a $50,000/5 Years 12,500 13,500 Increase in net income before tax S Income tax rate 26% S Income tax ь 3,510 Net after-tax cash inflow per year a-b c 22,490 c 3.10 Present value of net cash inflows 69,719 NPV $69.719-$50.000 19,719 iC) Straight-line depreciation rate Double-declining-balance rate 25% 50% Beginning Вook Depreciation Accumulated Ending Book Value Year Value Еxpense Depreciation 50,000 0 S 25,000 37,500 43,750 50,000 25,000 1 S 25,000 12,500 25,000 S 12,500 3 S 12,500 6,250 6,250 50,000 4 S 6,250 S 6,250 S Net After-tax 30% 10% Cash Depreciation Еxpense Тахable Income Net Cash Discount Present Value (50,000) 23,361 18,131 Factor Year Inflow Income Тахes Inflow (50,000) 25,700 21,950 20,075 20,075 (50,000) 26,000 1.000 S 0.909 25,000 1,000 S 300 1 4,050 26,000 12,500 13,500 0.826 26,000 26,000 0.751 15,076 13,711 6,250 19,750 5,925 19,750 4 6,250 5.925 0.683 Net Present Value (NPV) 20,280 Part b: Using the built-in IRR function in Excel Formula IRR(F57 F61,0.1) Estimated IRR = 37.42% a b After-tax cash flows: Year Amount (50,000) 22,490 0 S 22,490 22,490 S 4 S 22,490 Formula IRR(F80F84,0.1) Estimated IRR= 28.46% After-tax cash flows C Year Amount (50,000) 25,700 0 S 1 21,950 20,075 2 3 20,075 4 S Formula Estimated IRR 28.64% IRR(F80.F84,0.1)