Present value with taxes.
Ables Enterprises has an investment proposed by a division manager. Here are the estimates from the proposal:
1. The required investment for the project is $1,500.
2. The investment will result in two years of cash inflows of $1,000 each, assumed at the end of each year.
3. The investment is in a depreciable asset that will last exactly the two years, and have no value after that date. This means that there is $750 of depreciation each year.
4. The tax rate is 30 percent. Taxes are computed on the income after depreciation. The implication here is that taxes are levied on the cash minus the depreciation ($1,000 -$750).
5. The appropriate discount rate is 10 percent.
Required: What is the Net Present Value of the project?