Reference no: EM132483019
Question - E Griffin, the chief executive officer of Shore Lunch Enterprises, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $1,400,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following.
Year 1 $280,000
Year 2 $350,000
Year 3 $437,500
Year 4 $700,000
E Griffin agrees with his advisers that the company should use the discount rate (required rate of return) of 10% to compute net present value to evaluate the viability of the proposed project.
Required -
1. Compute the net present value of the proposed project. Should the company approve the project?
One of the advisers, CZ Plaza, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $280,000 per year for the four-year period. The company's income tax rate is 21% per year. Use this information to revise the company's expected cash flow from this project.
2. Compute the net present value of the project based on the revised cash flow forecast which should include the depreciation tax benefit discovered.
Should the company approve the project?
Set up a mini table of present value factors to make your calculations easier.
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