Question

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 $80,000. Champion estimates
the contract will provide annual net cash inflows (before taxes) of
$35,000. For tax purposes, the equipment will be depreciated as
follows:

Year 1 | $10,000 |

Year 2 | 20,000 |

Year 3 | 20,000 |

Year 4 | 20,000 |

Year 5 | 10,000 |

Although salvage value is ignored in the tax depreciation
calculations, Champion estimates the equipment will be sold for
$10,000 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?

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 years | $Answer | $Answer |

Tax savings from depreciation | ||

Year 1 | Answer | Answer |

Year 2 | Answer | Answer |

Year 3 | Answer | Answer |

Year 4 | Answer | Answer |

Year 5 | Answer | Answer |

After-tax equipment sale proceeds | Answer | Answer |

Total present value of future cash flows | Answer | |

Investment required in equipment | Answer | |

Net positive (negative) present value | $Answer |

Should Champion accept the contract?

Select the most appropriate answer below.

Champion should accept the contract because there is a negative net present value.

Champion should not accept the contract because there is a positive net present value.

Champion should accept the contract because there is a positive net present value.

Champion should not accept the contract because there is a negative net present value.

Answer #1

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 $88,000. Champion estimates
the contract will provide annual net cash inflows (before taxes) of
$38,000. For tax purposes, the equipment will be depreciated as
follows:
Year 1
$11,000
Year 2
22,000
Year 3
22,000
Year 4
22,000
Year 5
11,000
Although salvage...

Weighted Average Cost of Capital and Net Present Value
Analysis
Tate Company is considering a proposal to acquire new equipment for
its manufacturing division. The equipment will cost $192,000, be
useful for four years, and have a $12,000 salvage value. Tate
expects annual savings in cash operating expenses (before taxes) of
$68,000. For tax purposes, the annual depreciation deduction will
be $64,000, $86,000, $28,000, and $14,000, respectively, for the
four years (the salvage value is ignored on the tax return)....

Cardinal Company is considering a project that would require a
$2,500,000 investment in equipment with a useful life of five
years. At the end of five years, the project would terminate and
the equipment would be sold for its salvage value of $200,000. The
company’s discount rate is 12%. The project would provide net
operating income each year as follows:
Sales
$
2,853,000
Variable
expenses
1,200,000
Contribution
margin
1,653,000
Fixed expenses:
Advertising,
salaries, and other
fixed...

Net Present Value Method for a Service Company Coast-to-Coast
Inc. is considering the purchase of an additional delivery vehicle
for $38,000 on January 1, 20Y1. The truck is expected to have a
five-year life with an expected residual value of $6,000 at the end
of five years. The expected additional revenues from the added
delivery capacity are anticipated to be $60,000 per year for each
of the next five years. A driver will cost $43,000 in 20Y1, with an
expected...

Exercise 13-2 Net Present Value Analysis [LO13-2]
The management of Kunkel Company is considering the purchase of
a $26,000 machine that would reduce operating costs by $6,500 per
year. At the end of the machine’s five-year useful life, it will
have zero salvage value. The company’s required rate of return is
16%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine
the appropriate discount factor(s) using table.
Required:
1. Determine the net present value of the investment in...

Cardinal Company is considering a project that would require a
$2,875,000 investment in equipment with a useful life of five
years. At the end of five years, the project would terminate and
the equipment would be sold for its salvage value of $300,000. The
company’s discount rate is 16%. The project would provide net
operating income each year as follows:
Sales
$
2,871,000
Variable
expenses
1,018,000
Contribution
margin
1,853,000
Fixed expenses:
Advertising,
salaries, and other
fixed out-of-pocket costs
$...

The Dark Blue Furniture Company is considering two mutually
exclusive expansion projects. Project X will cost $20,000 to
implement, and will generate $10,000 each year in positive net,
after-tax cash flows for the next 3 years. Project Y will cost
$3,000 to implement, and will generate $2,500 in net, after-tax
cash flows for the next 3 years. The firm’s WACC is 9%.
a. Calculate the net present value of each project. Which is
preferable by the NPV method?
b. Calculate...

When the present value of the cash inflows exceeds the initial
cost of a project, then the project should be
Group of answer choices
accepted because the internal rate of return is positive
accepted because the profitability index is less than 1.
accepted because the profitability index is negative.
accepted because IRR is higher than the discount rate.
rejected because the net present value is negative

Net Present Value Method for a Service Company
Coast-to-Coast Inc. is considering the purchase of an additional
delivery vehicle for $39,000 on January 1, 20Y1. The truck is
expected to have a five-year life with an expected residual value
of $7,000 at the end of five years. The expected additional
revenues from the added delivery capacity are anticipated to be
$67,000 per year for each of the next five years. A driver will
cost $46,000 in 20Y1, with an expected...

Cardinal Company is considering a five-year project that would
require a $2,955,000 investment in equipment with a useful life of
five years and no salvage value. The company’s discount rate is
18%. The project would provide net operating income in each of five
years as follows:
Sales
$
2,865,000
Variable expenses
1,015,000
Contribution margin
1,850,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs
$
750,000
Depreciation
591,000
Total fixed expenses
1,341,000
Net operating income
$
509,000
Required:
1. Which...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 18 minutes ago

asked 24 minutes ago

asked 27 minutes ago

asked 29 minutes ago

asked 31 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago