Consider the example of Mezzo Diner in the text. Suppose that Mezzo qualifies for and decides to take advantage of a tax law that provides "bonus" depreciation on the investment. Assume that this allows Mezzo to deduct the cost of the investment, net of salvage value, in the first year of the investment. As a result, of course, no more depreciation is taken in years 2 through 5. Assume all other facts as in the text. Use Exhibit A.2.

Required:

a. What is the net present value of the investment assuming full expensing in the first year? (Round PV factor to 3 decimal places.)

Exhibit A.2 Cash Flow Schedule with Present Value Computations- Mezzo Diner Year 2 1 3 $ 138,000 $ 25,000 138,000 $ 25,000 138,000 $ 25,000 138,000 $ 25,000 138,000 25,000 8 9 10 Annual cash flows 11 Operating cash flows 12 Depreciation tax shield 13 14 Disinvestment flows 15 Return of working capital 16 Proceeds on disposal 17 Total cash flows 18 Present value factor 19 20 Discount rate 21 22 Present value of inflows 23 Less investment 24 Net present value $ (720,000 $ 163,000 $ 1.000 0.893 163,000 $ 0.797 163,000 $ 163,000 $ 0.712 0.636 120,000 100,000 383,000 0.567 12% $145,559 $129,911 $116,056 $103,668 $217,161 $ $ $ $ $712,355 1720,000 17,645) 75 Exhibit A.2 Cash Flow Schedule with Present Value Computations- Mezzo Diner Year 2 1 3 $ 138,000 $ 25,000 138,000 $ 25,000 138,000 $ 25,000 138,000 $ 25,000 138,000 25,000 8 9 10 Annual cash flows 11 Operating cash flows 12 Depreciation tax shield 13 14 Disinvestment flows 15 Return of working capital 16 Proceeds on disposal 17 Total cash flows 18 Present value factor 19 20 Discount rate 21 22 Present value of inflows 23 Less investment 24 Net present value $ (720,000 $ 163,000 $ 1.000 0.893 163,000 $ 0.797 163,000 $ 163,000 $ 0.712 0.636 120,000 100,000 383,000 0.567 12% $145,559 $129,911 $116,056 $103,668 $217,161 $ $ $ $ $712,355 1720,000 17,645) 75