Nunoz Inc. is considering an
investment project that would require an initial investment of $250,000 and
that would last for 9 years. The annual cash receipts from the project would be
$175,000 and the annual cash expenses would be $79,000. The equipment used in
the project could be sold at the end of the project for a salvage value of
$13,000. The company's tax rate is 30%. For tax purposes, the entire initial
investment will be depreciated over 7 years without any reduction for salvage
value. The company uses a discount rate of 10%.
130. When
computing the net present value of the project, what are the annual after-tax
cash receipts?
A) $52,500
B) $122,500
C) $139,286
D) $96,000
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
Annual
after-tax cash receipts = Annual cash receipts × (1 − Tax rate)
= $175,000 × (1 − 0.30) = $122,500
131. The
net present value of the project is closest to:
A) $140,863
B) $137,005
C) $193,020
D) $189,162
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
Annual
after-tax cash receipts = Annual cash receipts × (1 − Tax rate)
= $175,000 × (1 − 0.30) = $122,500
Annual after-tax expenses = Annual
expenses × (1 − Tax rate)
= $79,000 × (1 − 0.30) = $55,300
|
|
Initial investment....................................
|
$250,000
|
|
|
Depreciable life in years.........................
|
7
years
|
|
|
Annual depreciation...............................
|
$35,714
|
|
|
× Tax rate...............................................
|
0.30
|
|
|
Annual depreciation tax shield...............
|
$10,714
|
|
|
Gain on sale (asset fully depreciated)....
|
$13,000
|
|
|
× (1 − Tax rate).......................................
|
0.70
|
|
|
After-tax cash flow from salvage value.
|
$9,100
|
|
|
Year(s)
|
Amount
|
10%
Factor
|
PV
|
|
Initial investment...........
|
Now
|
($250,000)
|
1.000
|
($250,000)
|
|
Annual cash receipts (after-tax)...................
|
1-9
|
$122,500
|
5.759
|
705,478
|
|
Annual cash expenses (after-tax)...................
|
1-9
|
($55,300)
|
5.759
|
(318,473)
|
|
Depreciation tax shield
|
1-7
|
$10,714
|
4.868
|
52,156
|
|
Salvage value................
|
9
|
$9,100
|
0.424
|
3,858
|
|
Net present value...........
|
|
|
|
$193,019
|
Essay Questions
132. (Ignore
income taxes in this problem.) Cooney Inc. has provided the following data
concerning a proposed investment project:
|
|
Initial investment...............
|
$160,000
|
|
|
Life of the project..............
|
7
years
|
|
|
Annual net cash inflows....
|
$40,000
|
|
|
Salvage value....................
|
$16,000
|
The company uses a discount rate of
17%.
Required:
Compute the net present value of the
project.
Ans:
|
|
Year(s)
|
Amount
|
17%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($160,000)
|
1.000
|
($160,000)
|
|
Annual net cash receipts....
|
1-7
|
$40,000
|
3.922
|
156,880
|
|
Salvage value.....................
|
7
|
$16,000
|
0.333
|
5,328
|
|
Net present value...............
|
|
|
|
$ 2,208
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
133. (Ignore
income taxes in this problem.) Strausberg Inc. is considering investing in a
project that would require an initial investment of $270,000. The life of the
project would be 6 years. The annual net cash inflows from the project would be
$81,000. The salvage value of the assets at the end of the project would be
$27,000. The company uses a discount rate of 10%.
Required:
Compute the net present value of the
project.
Ans:
|
|
Year(s)
|
Amount
|
10%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($270,000)
|
1.000
|
($270,000)
|
|
Annual net cash receipts....
|
1-6
|
$81,000
|
4.355
|
352,755
|
|
Salvage value.....................
|
6
|
$27,000
|
0.564
|
15,228
|
|
Net present value...............
|
|
|
|
$ 97,983
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
134. (Ignore
income taxes in this problem.) Tiff Corporation has provided the following data
concerning a proposed investment project:
|
|
Initial investment..................
|
$960,000
|
|
|
Life of the project.................
|
6
years
|
|
|
Working capital required......
|
$20,000
|
|
|
Annual net cash inflows.......
|
$288,000
|
|
|
Salvage value........................
|
$144,000
|
The company uses a discount rate of
16%. The working capital would be released at the end of the project.
Required:
Compute the net present value of the
project.
Ans:
|
|
Year(s)
|
Amount
|
16%
Factor
|
PV
|
|
Initial investment.....................
|
Now
|
($960,000)
|
1.000
|
($ 960,000)
|
|
Annual net cash inflows..........
|
1-6
|
$288,000
|
3.685
|
1,061,280
|
|
Working capital invested.........
|
Now
|
($20,000)
|
1.000
|
(20,000)
|
|
Working capital released.........
|
6
|
$20,000
|
0.410
|
8,200
|
|
Salvage value...........................
|
6
|
$144,000
|
0.410
|
59,040
|
|
Net present value.....................
|
|
|
|
$ 148,520
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
135. (Ignore
income taxes in this problem.) Mattice Corporation is considering investing
$490,000 in a project. The life of the project would be 7 years. The project
would require additional working capital of $34,000, which would be released
for use elsewhere at the end of the project. The annual net cash inflows would
be $123,000. The salvage value of the assets used in the project would be
$49,000. The company uses a discount rate of 11%.
Required:
Compute the net present value of the
project.
Ans:
|
|
Year(s)
|
Amount
|
11%
Factor
|
PV
|
|
|
Initial investment...............
|
Now
|
($490,000)
|
1.000
|
($490,000)
|
|
|
Annual net cash inflows....
|
1-7
|
$123,000
|
4.712
|
579,576
|
|
|
Working capital invested...
|
Now
|
($34,000)
|
1.000
|
(34,000)
|
|
|
Working capital released...
|
7
|
$34,000
|
0.482
|
16,388
|
|
|
Salvage value.....................
|
7
|
$49,000
|
0.482
|
23,618
|
|
|
Net present value...............
|
|
|
|
$ 95,582
|
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
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