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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $65,000 to purchase and

eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $65,000 to purchase and install and $34,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $67,000 per year. The firms cost of capital (discount rate) is 12%.

Required:

1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.)

1a. The firm is not yet profitable and therefore pays no income taxes.

1b. The firm is in the 20% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply.

1c. The firm is in the 20% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.

2. What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR builit-in function in Excel to compute the IRR.

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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $65,000 to purchase and install and $34,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $67,000 per year. The firm's cost of capital (discount rate) is 12%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 20% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 20% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 x 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 2. What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR built-in function in Excel to compute the IRR. Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Reg 1C Req 2 The firm is in the 20% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. (Round your answer to nearest whole dollar amount.) Net present value $ 11,756 Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 1C Reg 2 The firm is in the 20% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 x 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. (Negative amounts should be indicated by a minus sign. Round discount factor to 3 decimal places and other answers to the nearest whole dollar amount.) Show less A Year Taxable Income Income Taxes Present Values $ $ $ Pre-Tax Cash Inflows $ (65,000) 33,000 33,000 33,000 33,000 DDB Depreciation Expense 0 32,500 16,250 8,125 8,125 0 500 16,750 24,875 24,875 0 100 3,350 4,975 4,975 After-tax Discount Net Cash Factor Inflow $ (65,000) 1.000 64,900 0.893 61,550 0.797 56,575 0.712 56,575 0.636 Net present value (NPV) (65,000) 57,956 49,055 40,281 35,982 4 $ 118,274 Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Req 1C Reg 2 What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR builit-in function in Excel to compute the IRR. (Round "Estimated IRR" to 1 decimal place.) Estimated IRR 35.9 % 29.3 % 90.0 % Reg 10 Req2) TABLE 1 Present Value of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20% 25% 30% 1 2 3 4 5 6 7 S 9 10 11 12 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.833 0.500 0.769 0.925 0.907 0.890 0.873 0.357 0.342 0.826 0.812 0.797 0.783 0.769 0.756 0.694 0.640 0.592 0.889 0.864 0.340 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.579 0.512 0.455 0.355 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.482 0.410 0.350 0.322 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.402 0.328 0.269 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.335 0.262 0.207 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.279 0.210 0.159 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.233 0.168 0.123 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.194 0.134 0.094 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.162 0.107 0.073 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.135 0.036 0.056 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.205 0.187 0.112 0.069 0.043 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.132 0.163 0.093 0.055 0.033 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.078 0.044 0.025 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.065 0.035 0.020 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.054 0.028 0.015 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.045 0.023 0.012 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.038 0.018 0.009 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.031 0.014 0.007 0.456 0.377 0.312 0.25% 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.026 0.012 0.005 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.018 0.007 0.003 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.013 0.005 0.002 0.375 0.295 0.233 0.134 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.010 0.004 0.001 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.004 0.001 0.000 0.253 0.151 0.130 0.094 0.068 0.049 0.036 0.026 0.019 0.014 0.010 0.008 0.002 0.000 0.000 0.205 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.001 0.000 0.000 14 15 16 17 18 20 24 30 35 40 Note: The present value (PV) factor for N periods and rate r per period =1=(1+r). For example, the PV factor for 10%, 5 years = 1= (1 +0.10) = 0.621 (rounded) TABLE 2 Present Value of Annuity of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20% 25% 30% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.385 0.877 0.870 0.833 0.500 0.769 1.836 1.559 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.528 1.440 1.361 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.106 1.952 1.816 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.539 2.362 2.166 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 2.991 2.689 2.436 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.326 2.951 2.643 6.002 5.786 5.582 5.389 5.206 5.033 4.368 4.712 4.564 4.423 4.288 4.160 3.605 3.161 2.802 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 3.337 3.329 2.925 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.031 3.463 3.019 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.192 3.571 3.092 8.760 8.306 7.887 7.499 7.139 6.305 6.495 6.207 5.938 5.687 5.453 5.234 4.327 3.656 3.147 9.385 .563 .384 7.943 7.536 7.161 6.314 6.492 6.194 5.918 5.660 5.421 4.439 3.725 3.190 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.342 5.583 4.533 3.780 3.223 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 4.611 3.824 3.249 15 11.118 10.380 9.712 9.108 3.559 1.061 7.606 7.191 6.311 6.462 6.142 5.847 4.675 3.359 3.268 16 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 4.730 3.837 3.283 17 12.166 11.274 10.477 9.763 9.122 8.544 3.022 7.549 7.120 6.729 6.373 6.047 4.775 3.910 3.295 12.659 11.690 10.528 10.059 9.372 3.756 3.201 7.702 7.250 6.840 6.467 6.128 4.812 3.928 3.304 13.134 12.085 11.158 10.336 9.604 .950 .365 7.839 7.366 6.938 6.550 6.198 4.543 3.942 3.311 13.590 12.462 11.470 10.594 9.318 9.129 3.514 7.963 7.469 7.025 6.623 6.259 4.870 3.954 3.316 14.451 13.163 12.042 11.061 10.201 9.442 3.772 8.176 7.645 7.170 6.743 6.359 4.909 3.970 3.323 15.247 13.799 12.550 11.469 10.529 9.707 8.985 3.343 7.784 7.283 6.835 6.434 4.937 3.981 3.327 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.373 6.464 4.945 3.985 3.329 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 .055 7.496 7.003 6.566 4.979 3.995 3.332 35 15.665 16.374 14.498 12.948 11.655 10.567 9.644 8.355 .176 7.586 7.070 6.617 4.992 3.998 3.333 40 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 4.997 3.999 3.333 15 Note: The present value (PV) annuity factor for N periods and a rate of r per period = [1 - (1 + r)-N) = r. For example, for N=5 and r=0.10, the PV annuity factor = 3.791 (rounded)

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