HOW DID YOU GET THE 12% FACTOR FIGURES?

6. Capital Budgeting 7 Questions* P13C.4 (Page 636) PROBLEM 13C-4 Basic Net Present Value Analysis Including Income Taxes [L08 Rapid Parcel Service has been offered an eight-year contract to deliver mail and small parcels between army installations. To accept the contract, the company would have to purchase several new delivery trucks at a total cost of $450,000. Other data relating to the contract follow Annual net cash receipts (before taxes) from the contract... . Cost of overhauling the motors $108,000 Salvage value of the trucks at If the contract were accepted, several old, fully depreciated trucks would be sold at a total price of S30,000. These funds would be used to help purchase the new trucks. For tax purposes, the com pany computes depreciation deductions assuming zero salvage value and uses straight-line depre- ciation. The trucks would be depreciated over eight years. The company requires a 12% after-tax return on all equipment purchases. The tax rte is 30% Required: Compute the net present value of this investment nearest whole dollar. Would you recommend that the contract be accepted? opportunity. Round all dollar amounts to the Tax Effect After-Tax Cash Flows 12% Factor Present Value of Cash Flows Items and Computations Year(s) Investment in new trucksNow Salvage from sale of the (1) Amount $(450,000) $(450,000) 1.000$(450,000) $30,000 1 - 0.30 $108,000 1- 0.30 $56,250 0.30 $(45,000) 1 - 0.30 $21,000 1.000 $75,600 4.968 $16,875 4.968 $(31,500) 0.567 21,000 375,581 83,835 (17,861) Annual net cash receipts. Depreciation deductions* 1-8 1-8 Salvage from the new $20,000 1- 0.30 $14,000 0.404 5,656 * $450,000 8 years- $56,250 per year Because the project has a positive net present value, the contract should be accepted