Question

Hinda Company has gathered the following information related
to an investment in new equipment:

annual net cash inflows .......................   $ 46,000
initial investment ............................      ???
life of new equipment .........................   10 years
working capital needed now ....................   $ 37,000
cost of capital ...............................   10%
income tax rate ...............................   30%

Assume the working capital needed now will be released for
investment elsewhere at the end of the project. The after-tax
net present value of the project was calculated as $24,740.

Calculate the amount of the initial investment.

To answer this question use the present value table factors
given below.
Factors from the present value of a lump sum table for:

i = 10%
n = 6       n = 7       n = 8       n = 9       n = 10 
0.565       0.513       0.467       0.424       0.385


Factors from the present value of an annuity table for:

i = 10%
n = 6       n = 7       n = 8       n = 9       n = 10
4.355       4.868       5.335       5.759       6.500

please label final answer as answer=............................

Answer 1

Solution:

	Particular	Amount	Working
	Annual saving	$135,779.79	(Depreciation + Net income before tax
Less:	Depreciation	$28,850.50
	Net income before tax	$106,929.29	(Income after tax/0.70)
Less:	Tax	$32,078.79
	Income after tax	$74,850.50	(Net annual cash flow + Depreciation)
Add:	Depreciation'	$28,850.50
	Net annual cash flow	$46,000
	Pv factor	6.5
	Net saving	$299,000
	Working capital	$14,245
	Pv amount	$313,245
Less:	Initial investment	$288,505	Balancing figure
	NPV	$24,740
	Depreciation	288505/10