Question

Greer Law Associates is evaluating a capital investment proposal for new office equipment for the current year. The initial investment would require the firm to spend $50,000. The equipment would be depreciated on a straight-line basis over five years with no salvage value. The firm’s accountant has estimated the before-tax annual cash inflow from the investment to be $15,000. The income tax rate is 40 percent and all taxes are paid in the year that the related cash flows occur. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end.

Required
What is the net present value of the capital investment proposal? Should the proposal be accepted? Why or why not?



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  • CreatedMarch 11, 2015
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