Question

Miller Company, which considers taxes in its capital budgeting decisions is considering the purchase of a machine with the following characteristics:

Initial cost (not including working capital)	$220,000
Immediate working capital requirement (released at the end of the project)	$20,000
Expected life of the project	4 years
Annual net operating cash inflows	$75,000
Residual value (at end of useful life)	$0
Annual straight-line depreciation expense	$55,000
Required rate of return (discount rate)	10%
Income tax rate	20%

Compute the after-tax net present value (NPV) of this investment opportunity [use PV (present value) tables]. Round your answer to the nearest dollar.

• ($1,270)

• ($14,930)

• ($4,002)

• ($36,140)

Answer 1

ANSWER IS ($14,930)

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EXPLANATION:

ANNUAL NET OPERATING CASH INFLOWS	$75,000
LESS: DEPREIATION	$55,000
ANNUAL CASH INFLOWS	$20,000
TAXES(20%)	$4,000
AFTER TAX INFLOWS	$16,000
ADD BACK: DEPRECIATION	$55,000
NET CASH INFLOWS	$71,000

INITIAL INVESTMENT (220,000 + 20,000)	($240,000)
PV OF CASH FLOWS @ 10% FOR 4 YEARS
($71,000*3.170)	$225,070
NPV	($14,930)