Ben Baxi, the president of Ben’s Moving Services, Inc., is planning to spend $640,000 for new trucks. He expects the trucks to increase the company’s cash inflow as follows.

The company’s policy stipulates that all investments must earn a minimum rate of return of 10 percent.

Round financial figures to nearest whole dollar.
a. Compute the net present value of the proposed purchase. Should Mr. Baxi purchase the trucks?
b. Kimberly Hall, the controller, is wary of the cash flow forecast and points out that Mr. Baxi failed to consider that the depreciation on trucks used in this project will be tax deductible. The depreciation is expected to be $150,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the company’s expected cash flow from this purchase.
c. Compute the net present value of the purchase based on the revised cash flow forecast.
Should Mr. Baxi purchase thetrucks?

  • CreatedFebruary 07, 2014
  • Files Included
Post your question