Question

Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $80,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $35,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $10,000 Year 2 20,000 Year 3 20,000 Year 4 20,000 Year 5 10,000 Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $10,000 after five years. Assuming a 35% income tax rate and a 10% hurdle rate, compute the net present value of this contract proposal. Using net present value analysis, should Champion accept the contract?

Answer 1

After tax cash How Analysis Amount Puesent value $86,240 Affee tar cash intloco for 5 years $22,750 Pax Savings from Depueciation You 1 $ 3500 $3182 Year 2 7000 $5785 Yeau 3 $ 7000 85259 Year 4 $ 4000 $ 4781 Year 5 83500 $ 2173 Allee tar equip Sale Puoceedi $10.000 $ 6209 Poral porq forteu cash Hous investment requied in equip $113,629 $ 80.000 $33,629 NPy Sc'nce, npr is positive, contuact should be accepted.