Calculate the net investment-net cash flow


Problem:

The capital budgeting department is contemplating whether to purchase a piece of equipment. The new piece of equipment costs $900,000. The equipment currently being used by the firm would be replaced by the new and would be sold for $100,000 which is the firm's book value for the asset. The estimated useful life of the new equipment is 3 years. The firm's capital gain tax rate is 20% and their ordinary tax rate is 40%. The new equipment is not expected to have a salvage value at the end of its useful life and the firm uses straight-line depreciation.

Estimated Earnings:

Year Without the new equipment    With the new equipment
1    $500,000    $1,200,000
2    $700,000    $1,500,000
3    $900,000    $1,900,000

Depreciation Information
Year    Without the new equipment    With the new Equipment
1    $200,000    $500,000
2    $250,000    $550,000
3    $300,000    $600,000

Calculate the net investment, net cash flows, the net present value and the Internal Rate of Return on this project assuming an 8% cost of capital.

Solution Preview :

Prepared by a verified Expert
Finance Basics: Calculate the net investment-net cash flow
Reference No:- TGS02051987

Now Priced at $20 (50% Discount)

Recommended (95%)

Rated (4.7/5)

2015 ©TutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.