Trump Company must install safety devices throughout its plant or it will lose its insurance coverage. Two alternatives are acceptable to the insurer. The first costs $800 000 to install and $140 000 to maintain annually. The second costs $1 200 000 to install and $70 000 to maintain annually. Each has a 10-year income tax life and a 10-year useful life. Trump's cost of capital (discount rate) is 12 per cent, its marginal tax rate is 30 per cent and it uses straight-line depreciation.

Present value interest factor of an (ordinary) annuity of $1 per period at 12% for 10 years, PVIFA (12%,5), is 5.650.

Required:

(a) What is the after-tax cash flow for each projects? (6 marks)

(b) Which system should be installed using NPV DCF method? (9 marks)

Answer 5: [Answer here]

(a)

i) After-tax Cash flows First Project

Description Year 0 Year 1-10

Net Cash flow

(b)

i) NPV First Project = (calculate and insert your break down figure below)

NPV

=

[Show workings here]

(a) i) After-tax Cash flows Second Project

Description Year 0 Year 1-10

Net Cash flow

b)

ii) NPV Second Project = (calculate and insert your break down figure below)

NPV

=

[Show workings here]

Decision: (write which project is better and why?) =