Compute the npv of the investment

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Reference no: EM131245209

You are given the following information: The Dorkin Company has made an investment of $40,000, which is expected to yield benefits over a five-year period. Annual cash inflows of $90,000 and annual cash outflows of $75,000 are expected, excluding taxes and the depreciation tax shelter. The tax rate is 40%, and the cost of capital is 8%. Dorkin Company uses straight-line depreciation.

a) Compute the NPV of the investment.

b) On investigation, you discover that no adjustments have been made for inflation or price-level changes. The data for the first year are correct, but after that, inflows are expected to increase at 4% per year, outflows are expected to increase at 6% per year, and the annual rate of inflation is expected to be about 6%. Reevaluate the NPV of the project in light of this information.

Reference no: EM131245209

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