A firm is considering the following investment project: Before-Tax Cash Flow Yea
ID: 2435218 • Letter: A
Question
A firm is considering the following investment project:
Before-Tax
Cash Flow
Year (thousands)
0 -$1000
1 +500
2 +340
3 +244
4 +100
5 +100 (+125 Salvage Value)
The project has a 5-year useful life with a $125,000 salvage value, as shown. Double declining balance deprectiation will be used, assuming the $125,000 salvage value. The combined income tax rate is 34%. If the firm requires a 10% after-tax rate of return, should the project be undertaken?
Explanation / Answer
Income after income tax of 34% Ist year=$500*66% -330 2 year=340*66% -224.4 3year=244*66% -161.04 4th year=100*66% -66 5th year=225*66% -148.5 Net present value of each year return by usingxl sheet 1year 300 2year 185345 3year 120.99 4 year 45.08 5 year 137.29 788.81 investment $1,000 Less Return 788.8 211.2 loss The return on investment is less than the investment hence the undertaking the project is not advisable.