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Fry Blind Services cleans Venetian and vertical blinds in offices and private homes. They have identified an expensive piece of equipment that will clean all the slats at once and produce significant time savings
The company accountant has prepared the following analysis:
Expense Reduction in First Year, in cash
$307,000
Additional Taxes Resulting (@ 25%)
(77,000)
Annual Depreciation Expense
$140,000
Depreciation Tax Shield
35,000
Annual Cash Flow
$265,000
Estimated Life of Equipment
5 years
Salvage Value after 5 years
$0
Cost of Capital
9%
Present Value of Annual Cash Flow
($265,000 per year @ 9% for 5 years.)
$1,030,758
Cost of the Equipment
(1,100,000)
Net Present Value of the Equipment
mce_markernbsp; (69,242)
Dennis Demorgan, the VP of Operations, is not convinced that the analysis is valid. He suggests that, after the first year, because of inflation, the company can expect to reduce its costs by an additional 5% each year.
Rework the analysis, based on Demorgan's assumption.
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