An investment costing \($200,000\) today will result in cash savings of \($85,000\) per year for three years. The company has a tax rate of 40 percent, and requires an 11 percent rate of return. Find the net present value of this investment using the format shown in Table 8.7. Round to the nearest dollar.

Table 8.7

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Net Present Value Calculation with Income Taxes for Scientific Products Inc. Timeline (n) Today 0 Year 1 Year 2 Year 3 Year 4 Year 5 Purchase price Working capital $(400,000) ( 50,000) $ 50,000 Annual after-tax cash receipts Annual depreciation tax savings Total cash in (out) $ 30,000 $ 36,000 $ 72,000 $120,000 78,000 $(450,000) 32,000 $ 62,000 32,000 PV factor (r 10%) Present value x1.0000 x0.9091 $ 68,000 X0.8264 32,000 $104,000 x0.7513 32,000 $152,000 32,000 $160,000 x0.6830 x0.6209 $(450,000) + $ 56,364 + $56,195 + $ 78,135 + $103,816 + $ 99,344 = $(56,146) Since net present value is <0, reject the investment. (The investment provides a return less than 10%.) Net Present Value "Initial investment purchase price and working capital do not directly affect net income, and therefore are not adjusted for income taxes. "Amount equals net cash receipts before taxes x (1- tax rate). For year 1, $30,000 $50,000 x (10.40); for year 2, $36,000 $60,000 x (10.40); and so forth. Depreciation tax savings equals depreciation expense times the tax rate. Depreciation expense is $80,000 (= $400,000 cost + 5 year useful life). Thus, annual depreciation tax savings is $32,000 ($80,000 depreciation expense x 0.40 tax rate).