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 $58,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $21,000. For tax purposes, the equipment will be depreciated as follows:
Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $5,000 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?
Round answers to the nearest whole number. Use rounded answers for subsequent calculations.
Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers.
Homework Answers
Meaning of Net Present Value:
Net present value is the difference between the present value of Cash inflows and present value of cash outflows over a period of time. Net present Value is used in Capital Budgeting and investment planning to analyse the profitability of the project.
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Champion Company is considering a contract that would require an expansion of its food processing capabilities....
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
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 $58,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $21,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $8,000 Year 2 16,000 Year 3 16,000 Year 4 10,000 Year 5 8,000 Although salvage...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
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...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
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 $72,000 Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 59,000 Year 2 1.000 War 18.000 Year 4 18.000 Although salvage value is ignored in...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
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...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
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 $72,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $9,000 Year 2 18,000 Year 3 18,000 Year 4 18,000 Year 5 9,000 Although salvage...
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal...
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $204,000, be useful for four years, and have a $15,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $71,000. For tax purposes, the annual depreciation deduction will be $68,000, $91,400, $29,700, and $14,900, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal...
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $216,000, be useful for four years, and have a $17,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $73,000. For tax purposes, the annual depreciation deduction will be $72,000, $96,800, $31,500, and $15,700, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Reed Incorporated is considering a proposal...
Weighted Average Cost of Capital and Net Present Value Analysis Reed Incorporated is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $192,000, be useful for four years, and have a $12,000 salvage value. Reed expects annual savings in cash operating expenses (before taxes) of $68,000. For tax purposes, the annual depreciation deduction will be $64,000, $86,000, $28,000, and $14,000, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal...
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $204,000, be useful for four years, and have a $15,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $71,000. For tax purposes, the annual depreciation deduction will be $68,000, $91,400, $29,700, and $14,900, respectively, for the four years (the salvage value is ignored on the tax return)....
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 12%. The project would provide net operating income in each of five years as follows: $ 2,746, eee 1,126, eee 1,620,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 615, eee 583,000 1,198,000 422,000 Click...
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...
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 $72,000 Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 59,000 Year 2 1.000 War 18.000 Year 4 18.000 Although salvage value is ignored in...
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...
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 $72,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $9,000 Year 2 18,000 Year 3 18,000 Year 4 18,000 Year 5 9,000 Although salvage...
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $204,000, be useful for four years, and have a $15,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $71,000. For tax purposes, the annual depreciation deduction will be $68,000, $91,400, $29,700, and $14,900, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $216,000, be useful for four years, and have a $17,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $73,000. For tax purposes, the annual depreciation deduction will be $72,000, $96,800, $31,500, and $15,700, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Reed Incorporated is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $192,000, be useful for four years, and have a $12,000 salvage value. Reed expects annual savings in cash operating expenses (before taxes) of $68,000. For tax purposes, the annual depreciation deduction will be $64,000, $86,000, $28,000, and $14,000, respectively, for the four years (the salvage value is ignored on the tax return)....
Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $204,000, be useful for four years, and have a $15,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $71,000. For tax purposes, the annual depreciation deduction will be $68,000, $91,400, $29,700, and $14,900, respectively, for the four years (the salvage value is ignored on the tax return)....
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 12%. The project would provide net operating income in each of five years as follows: $ 2,746, eee 1,126, eee 1,620,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 615, eee 583,000 1,198,000 422,000 Click...
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