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Dwyer Company is considering two investment projects. Relevant cost and cash flow information on the two projects

Question:

Dwyer Company is considering two investment projects. Relevant cost and cash flow information on the two projects is given below:

Project A Project B Investment in heavy trucks Investment in working capital Annual net cash inflows Life of the project

The trucks would have a $15,000 salvage value in nine years. For tax purposes, the company computes depreciation deductions assuming zero salvage value and uses straight-line depreciation. The trucks will be depreciated over five years. At the end of nine years, the working capital will be released for use elsewhere. The company requires an after-tax return of 12% on all investments. The tax rate is 30%.


Required:

Compute the net present value of each investment project. Round to the nearest whole dollar.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Project A Project B Investment in heavy trucks Investment in working capital Annual net cash inflows Life of the project S130,000 $130,000 $25,000 9 years" S25,000 9 years

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Jehal Shah
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In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue

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