Problem
NPV: Taxes and Accelerated Depreciation Assume that United Technologies Corporation is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 12,000 design hours per year; an operating cost savings of $65 per hour. The annual cash expenditures of operating the CAD system are estimated to be $600,000. The CAD system requires an initial investment of $200,000. The estimated life of this system is ?ve years with no salvage value. The tax rate is 21%, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of14%.
Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any undepreciated balance) starting in Year 4.
Determine the project's net present value.