Problem 1: Management is considering purchasing an asset for $20,000 that would have a useful life of 10 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 10 years using the straight-line method. The asset would generate annual net cash inflows of $12,000 throughout its useful life. The project would require additional working capital of $6,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 13%.
Required to do:
1. What is the annual NET (after tax) Cash Inflows?
2. What is the annual Depreciation Deduction?
3. What is the Net Present Value for this project?
Problem 2: ABC Outlet Store is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows
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Location A
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Location B
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Location C
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Internal rate of return
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13%
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17%
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20%
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Net present value
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$25,000
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$40,000
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$20,000
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The owner does not understand how the location with the highest percentage return has the lowest net present value.
Question: Explain to the owner what is (are) the probable cause(s) of the comparable differences.