Menu QUESTION 30 Partaly corresct 39 poins out of 100 PRog question E1 Net Prese
ID: 2564915 • Letter: M
Question
Menu QUESTION 30 Partaly corresct 39 poins out of 100 PRog question E1 Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $72,000. Champion estimates net cash infiows (before taxes) of $30.000. For tax purposes, the equipment will be depreciated as folows: the contract will provide annual 16 Year 1 $9,000 21 Year 2 18,000 Year 3 18,000 Year 4 18,000 Year 5 9,000 26 31 Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $9.000 after five years Assuming a 35% income tax rate and a 10% cutoff rate, compute the net present value of this contract proposal. Using net present value analysis should Champion accept the contract? 36 Finis Tim Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers. After-Tax Cash Flow Analysis Amount Present Value After-tax cash inflows for 5 yearsS19,500 Tax savings from depreciation 3,150 2835 x Year 1Explanation / Answer
AFTER TAX CASH FLOW ANALYSIS After tax cash inflows for 5 years $19,500 73924.5 (30000*(1-35%)) for 5 years discounted @10% i.e 3.791 Tax savings from depreciation Year 1 (9000*35%) PV factor for first yr 0.909 $3,150 2863.35 Year 2 (18000*35%) PV factor for 2 nd year 0.826 $6,300 5203.8 Year 3 (18000*35%) PV Factor for 3 rd year 0.751 $6,300 4731.3 Year 4 (18000*35%) PV factor for 4th year 0.683 $6,300 4302.9 Year 5 (9000*35%) PV factor for 5 th year 0.621 $3,150 1956.15 After tax equipmetn sale proceed (9000*65%) @ 0.621 $5,850 3632.85 Total Present value of future cash inflows 96,614.85 Investment required in Equipment 72,000 Net Positive present value 24,614.85 Yes, Champion must accept the contract