Applying the net present value approach with and without tax considerations Ken Cofield, the president of Ken’s Moving Services, Inc., is planning to spend $250,000 for new trucks. He expects the trucks to increase the company’s cash inflow as follows.

L.O. 3 Year 1 Year 2 Year 3 Year 4

$65,400 $71,286 $77,702 $84,694 The company’s policy stipulates that all investments must earn a minimum rate of return of 10 percent.

Required

a. Compute the net present value of the proposed purchase. Should Mr. Cofield purchase the trucks?

b. Chris Wilfred, the controller, is wary of the cash flow forecast and points out that Mr. Cofield failed to consider that the depreciation on trucks used in this project will be tax deductible. The depreciation is expected to be $60,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the company’s expected cash flow from this purchase.

c. Compute the net present value of the purchase based on the revised cash flow forecast. Should Mr.

Cofield purchase the trucks?