Compute the net present value of the project based on the revised cash flow forecast
Problem 16-21Â Â Â Â Â Â Applying the net present value approach with and without tax considerations
Paxton Kingsley, the chief executive officer of Kingsley Corporation, has assembled his top ad- visers to evaluate an investment opportunity. The advisers expect the company to pay $400,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following.
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Year 1
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Year 2
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Year 3
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Year 4
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$84,000
|
$96,000
|
$120,000
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$184,000
|
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Mr. Kingsley agrees with his advisers that the company should use the discount rate (re- quired rate of return) of 12 percent to compute net present value to evaluate the viability of the proposed project.
Required
a.     Compute the net present value of the proposed project. Should Mr. Kingsley approve the project?
b.     Wilma Pate, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $80,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the compa- ny’s expected cash flow from this project.
c.     Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Kingsley approve the project?
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Answers
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Posted 31 May 2017 08:05 AM
My Price 6.00
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