(Alternative depreciation methods; NPV; sensitivity analysis) Allison West Coast Design Co. is considering an investment in computer-based production technology as part of a business reengineering process. The necessary equipment, installation, and training will cost $30,000,000, have a life of eight years, and generate annual net before-tax cash flows of $6,200,000 from operations. The technology will have no salvage value at the end of its eight-year estimated life. The company’s tax rate is 30 percent, and its cost of capital is 6 percent.

a. If Allison uses straight-line depreciation for tax purposes, is the project acceptable using the net present value method?

b. Assume that the tax law allows the company to take accelerated annual depreciation on this asset in the following manner:

What is the net present value of the project? Is it acceptable?
C. Recompute parts

(a) and (b), assuming the tax rate is increased to 40 percent. LO.1 

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Years 1-2 Years 3-8 23% of cost 9% of cost