Question - Antonio Melton, the chief executive officer of Perez Corp., has assembled his top advisors to evaluate an investment opportunity. The advisers expect the company to pay $415,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following:
Year 1 Year 2 Year 3 Year 4
$89,0000 $99,000 $123,000 $189,000
Mr. Melton agrees with is advisers that the company should use the discount rate (required rate of return) of 12% to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1).
a. Compute the net present value of the project. Should Mr. Melton approve the project?
b. & c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on the equipment used in this project will be tax deductible. The depreciation is expected to be $83,000 per year for the 4 year period. The company's income tax rate is 35% per year. Use this information to revise the company's expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the project?