The head of the corporate tax division of a major public relations firm has proposed investing $340,000 in personal computers for the staff. The useful life and recovery period for the computers are both 5 years. The firm uses MACRS depreciation. There is no terminal salvage value. Labor savings of $140,000 per year (in year-zero dollars) are expected from the purchase. The income tax rate is 45%, and the after-tax required rate of return is 14%, which includes a 2% element attributable to inflation. (Click the icon to view the present value factor table.) (Click the icon to view the present value annuity factor table.) (Click the icon to view the selected MACRS depreciation schedule.) Read the requirements. Requirement 1. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.02 x year 0 cash flow; year 2 cash flow = 1.022 x year 0 cash flow; etc.) Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. Begin by calculating the present value of the after-tax cash flows from labor savings. (Enter the present value factors to four decimal places, "X.XXXX." Round dollar amounts to the nearest whole number.) Present value X of $1 Cash Total Present Requirements at 14% Inflow Value Present value of lump sum after-tax cash flows from labor savings Year 1 x 1. Compute NPV of the computers. Use the ninal required of retu and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.02 x year 0 cash flow.) 2. Compute the NPV of the computers using the nominal required rate of return without adjusting the cash flows for inflation. 3. Compare your answers in numbers 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain. Year 2 Year 3 X - Year 4 x Year 5 X - Present value of after-tax cash flows from labor savings Print Done X Data table 3-Year 5-Year 7-Year 10-Year Tax Year Property Property Property Property 20.00 % 1 33.33% 14.29 % 10.00 % 2. 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52 12.49 11.52 5 11.52 8.93 9.22 6 5.76 8.92 7.37 7 8.93 6.55 8 4.46 6.55 9 6.56 10 6.55 11 3.28 Print Done X Data table Present Value of $1 Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 1 9709 .9615 -9524 .9434 .9346 .9259 9091 .89298772 8621 .8475 8333 2 .9426 9246 .9070 .8900 .8734 .8573 .8264 .7972 .7695 7432 .7182 6944 3 .9151 .8890 .8638 .8396 8163 7938 7513 .7118 .6750 6407 .6086 5787 4 .8885 .8548 8227 .7921 7629 .7350 6830 .6355 5921 5523 5158 4823 5 .8626 .8219 .7835 .7473 .7130 6806 .6209 .5674 5194 4761 4371 4019 6 .8375 .7903 .7462 .7050 6663 6302 5645 .5066 4556 4104 3704 3349 7 .8131 .7599 .7107 .6651 .6227 5835 5132 4523 3996 3538 3139 2791 8 .7894 .7307 .6768 .6274 .5820 5403 4665 40393506 3050 2660 2326 9 .7664 .7026 .6446 .5919 .54395002 4241 3606 3075 2630 2255 1938 10 7441 .6756 .6139 .5584 5083 4632 3855 3220 2697 2267 1911 . 1615 15 .6419 5553 4810 4173 3624 3152 2394 .1827 1401 1079 .0835 0649 20 .5537 4564 3769 3118 2584 2145 1486 .1037 0728 .0514 .0365 0261 25 4776 3751 2953 .2330 1842 1460 0923 0588 0378 0245 01600105 30 4120 3083 2314 1741 1314 0994 0573 0334 0196 0116 00700042 Print Done Data table Present Value of Ordinary Annuity of $1 Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 1 .9709 9615 9524 .9434 9346 .9259 9091 .8929 .8772 8621 8475 .8333 2 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 1.5278 3 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 4 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.1699 3.0373 2.9137 2.7982 2.6901 2.5887 5 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331 3.2743 3.1272 2.9906 6 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 7 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 3.6046 8 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.3349 4.9676 4.6389 4.3436 4.0776 3.8372 9 7.7861 6.2469 5.7590 5.3282 4.9464 4.6065 4.3030 4.0310 7.4353 7.1078 6.8017 6.5152 8.11097.7217 7.3601 7.0236 10 8.5302 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 15 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 4.6755 20 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 8.5136 7.4694 6.6231 5.9288 5.3527 4.8696 25 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 4.9476 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578 9.4269 8.0552 7.0027 6.1772 5.5168 4.9789 30 Print Done The head of the corporate tax division of a major public relations firm has proposed investing $340,000 in personal computers for the staff. The useful life and recovery period for the computers are both 5 years. The firm uses MACRS depreciation. There is no terminal salvage value. Labor savings of $140,000 per year (in year-zero dollars) are expected from the purchase. The income tax rate is 45%, and the after-tax required rate of return is 14%, which includes a 2% element attributable to inflation. (Click the icon to view the present value factor table.) (Click the icon to view the present value annuity factor table.) (Click the icon to view the selected MACRS depreciation schedule.) Read the requirements. Requirement 1. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.02 x year 0 cash flow; year 2 cash flow = 1.022 x year 0 cash flow; etc.) Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. Begin by calculating the present value of the after-tax cash flows from labor savings. (Enter the present value factors to four decimal places, "X.XXXX." Round dollar amounts to the nearest whole number.) Present value X of $1 Cash Total Present Requirements at 14% Inflow Value Present value of lump sum after-tax cash flows from labor savings Year 1 x 1. Compute NPV of the computers. Use the ninal required of retu and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.02 x year 0 cash flow.) 2. Compute the NPV of the computers using the nominal required rate of return without adjusting the cash flows for inflation. 3. Compare your answers in numbers 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain. Year 2 Year 3 X - Year 4 x Year 5 X - Present value of after-tax cash flows from labor savings Print Done X Data table 3-Year 5-Year 7-Year 10-Year Tax Year Property Property Property Property 20.00 % 1 33.33% 14.29 % 10.00 % 2. 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52 12.49 11.52 5 11.52 8.93 9.22 6 5.76 8.92 7.37 7 8.93 6.55 8 4.46 6.55 9 6.56 10 6.55 11 3.28 Print Done X Data table Present Value of $1 Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 1 9709 .9615 -9524 .9434 .9346 .9259 9091 .89298772 8621 .8475 8333 2 .9426 9246 .9070 .8900 .8734 .8573 .8264 .7972 .7695 7432 .7182 6944 3 .9151 .8890 .8638 .8396 8163 7938 7513 .7118 .6750 6407 .6086 5787 4 .8885 .8548 8227 .7921 7629 .7350 6830 .6355 5921 5523 5158 4823 5 .8626 .8219 .7835 .7473 .7130 6806 .6209 .5674 5194 4761 4371 4019 6 .8375 .7903 .7462 .7050 6663 6302 5645 .5066 4556 4104 3704 3349 7 .8131 .7599 .7107 .6651 .6227 5835 5132 4523 3996 3538 3139 2791 8 .7894 .7307 .6768 .6274 .5820 5403 4665 40393506 3050 2660 2326 9 .7664 .7026 .6446 .5919 .54395002 4241 3606 3075 2630 2255 1938 10 7441 .6756 .6139 .5584 5083 4632 3855 3220 2697 2267 1911 . 1615 15 .6419 5553 4810 4173 3624 3152 2394 .1827 1401 1079 .0835 0649 20 .5537 4564 3769 3118 2584 2145 1486 .1037 0728 .0514 .0365 0261 25 4776 3751 2953 .2330 1842 1460 0923 0588 0378 0245 01600105 30 4120 3083 2314 1741 1314 0994 0573 0334 0196 0116 00700042 Print Done Data table Present Value of Ordinary Annuity of $1 Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 1 .9709 9615 9524 .9434 9346 .9259 9091 .8929 .8772 8621 8475 .8333 2 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 1.5278 3 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 4 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.1699 3.0373 2.9137 2.7982 2.6901 2.5887 5 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331 3.2743 3.1272 2.9906 6 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 7 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 3.6046 8 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.3349 4.9676 4.6389 4.3436 4.0776 3.8372 9 7.7861 6.2469 5.7590 5.3282 4.9464 4.6065 4.3030 4.0310 7.4353 7.1078 6.8017 6.5152 8.11097.7217 7.3601 7.0236 10 8.5302 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 15 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 4.6755 20 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 8.5136 7.4694 6.6231 5.9288 5.3527 4.8696 25 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 4.9476 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578 9.4269 8.0552 7.0027 6.1772 5.5168 4.9789 30 Print Done