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Please Use TI BAII Plus Calculator and Show How You Get the Answer with it. The Company...

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Finance

Please Use TI BAII Plus Calculator and Show How You Getthe Answer with it.

The Company is evaluating an asset that may increase sales by$120,000 every year for 4 years. There is no expected change in netoperating working capital. The company's cost of capital is 6.5%.The proposed asset costs $400,000, will require $20,000 to modifyfor operations, and falls in the 3-year class MACRS fordepreciation rates: .33, .45, .15, and .07 for years 1 through 4,respectively. At the end of the 4 years, it is expected that theasset may sell for $5,000. The company's tax rate is 21%.SHOW ALL WORK.

a) What is the initial outlay for this project?

b) What are the operating cash flows in Years 1 through 4?

c) As part of the terminal cash flow in Year 4, what is theafter-tax salvage value of the asset?

d) What is the net present value of this proposed assetinvestment? Should it be accepted or rejected? SHOW ALLWORK ON THE TI BAII Plus Calculator.

Answer & Explanation Solved by verified expert
4.3 Ratings (840 Votes)

a The initial outlay of the project
Asset Cost 400000
Modification cost 20000
Initial outlay 420000
b Operating cashflows
1 2 3 4
Additional sales 120000 120000 120000 120000
Less Depreciation 138600 189000 63000 29400
Profit -18600 -69000 57000 90600
Tax @ 21% 11970 19026
Net profit -18600 -69000 45030 71574
Add Depreciation 138600 189000 63000 29400
Cashflow 120000 120000 108030 100974
c After-tax salvage value
Salvage value 5000
Book value 0
Capital Gain 5000
Tax on gain 1050
Post-tax Net salvage value 3950
d Net Present Value
1 2 3 4
Cashflow 120000 120000 108030 100974
Net Salvage Value 3950
Total cashflow 120000 120000 108030 104924
PV @ 6.5% 0.94 0.88 0.83 0.78
Pv of cashflow 112676.06 105799.11 89432.54 81559.85 389467.56
Net Present Value = PV of cashflow - Initial Outlay
-30532.44
The Project should be rejected because of Negative NPV
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