Solution-Compute the NPV of the computers

Compute the NPV of the computers

Reference no: EM131813746

Question - The head of the corporate tax division of a major public relations firm has proposed investing $295,000 in personal computers for the staff. The useful life and recovery period for the computers are both 5 years. The firm used MACRS depreciation. There is no terminal salvage value. Labor savings of $125,000 per year (in year-zero dollars) are expected from the purchase. The income tax rate is 45% and the after tax required rate of return is 20%, which includes a 4% element attributable to inflation.

1) Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation (For example, year 1 cash flow = 1.04 x year 0 cash flow).

2) Compute the NPV of the computers using the nominal require rate of return without adjusting the cash flow for inflation.

3) Compare your answers in numbers 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain.

Reference no: EM131813746

Questions Cloud

Annual interest rate compounded annually : With a 13.9% annual interest rate compounded annually, what is the minimum price that you should sell your two payments for right now? "

Determine the purpose of creating a digital hash : Determine the purpose of creating a digital hash. Explain in detail the need for this procedure and the potential damage if this critical step is not taken.

Determining problem on life insurance claims : Test whether the true proportion of all life insurance claims made to this company that are settled within 30 days is less than 85%.

Record the journal entries for the issuance of the bonds : The market rate at the date of issue is also 10%. For simplicity, use a 360-day year and 3 day months for all calculations

Compute the NPV of the computers : Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation

Management in making the proper lease-versus-buy decision : To assist management in making the proper lease-versus-buy decision, How high could the residual value get before the net advantage of leasing falls to zero?

Asserting interest group of all smokers : A special interest group asserts that 90% of all smokers began smoking before age 18. In a sample of 850 smokers, 687 began smoking before age 18.

Discuss the demand schedule from the pizza poll : Combine the above supply schedule with the demand schedule from the pizza poll. Now suppose the government imposed a price ceiling

What entries are necessary to adjust the accounting records : Choice Two Manufacturing, which began operations in 2011, What entry(ies) are necessary to adjust the accounting records for the change in accounting principle

User Account

All Pages

Compute the NPV of the computers

Reference no: EM131813746

Reference no: EM131813746

Questions Cloud

Reviews

Write a Review

Accounting Basics Questions & Answers

How much control does fed have over this longer real rate

Coures:- fundamental accounting principles

Accounting problems

Theory of interest - term structure of interest rates

Write a report on internal controls

Prepare the bank reconciliation for company

Cost-benefit analysis

Theory of interest

Liquidity and profitability

What is the expected risk premium on the portfolio

Simple interest and compound interest

Capm and venture capital

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT