Question

Plant Company is contemplating the purchase of a new piece of equipment for $45,000, Plant is in the 30% income tax bracket Predicted annual aher-tax cash inflows truth this Investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively The firm uses straight line depreciation with no residual visille at the end of fe years

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax (Note: PV $1 factors for 4% are as follows: for year 1 0.962. for year 2 0.925, for year 3-0.889, for year 40.855, for year 50.822, the PV annuity factor for 4%, 5 years 4.452.) At an after tax discount rate of 4%, the estimated net present valu (NPV) of the proposed Investment is (rounded to the nearest hundred dollars):
Multiple Choice
A) $5,000
B) $12.3000
C) $9,300
D) $6,000
E) $1800

Answer 1

The estimated net present value (NPV) of the proposed investment at an after-tax discount rate of 4% is approximately $1,800, which is option E.

Step-by-step explanation:

To calculate the estimated net present value (NPV) of the proposed investment at an after-tax discount rate of 4%, you need to discount each of the predicted after-tax cash inflows back to their present value (PV). Using the provided PV factors for 4%, the calculation is as follows:

• Year 1: $18,000 × 0.962 = $17,316
• Year 2: $15,000 × 0.925 = $13,875
• Year 3: $9,000 × 0.889 = $8,001
• Year 4: $6,000 × 0.855 = $5,130
• Year 5: $3,000 × 0.822 = $2,466

The sum of these values is the total present value of the inflows: $17,316 + $13,875 + $8,001 + $5,130 + $2,466 = $46,788.

Then, we must subtract the initial investment of $45,000 to find the NPV:

NPV = Total PV of inflows - Initial investment

NPV = $46,788 - $45,000 = $1,788

Since we need to round to the nearest hundred dollars, the NPV is approximately $1,800.

Therefore, the answer is E) $1,800.