Kansas Salt Co. is considering an investment in computer-based production technology as part of a business reengineering process. The necessary equipment will cost $18,000,000, have a life of eight years, and generate annual net before-tax cash flows of $3,100,000 from operations. Cost of installation and training is considered nominal. The equipment will have no salvage value at the end of its eight-year estimated life. The company’s tax rate and cost of capital are, respectively, 30 percent and 5 percent.
a. If Kansas Salt Co. uses straight-line depreciation for tax purposes, is the project acceptable using the net present value method?
b. Assume that the tax law allows the company to take accelerated annual depreciation on this asset in the following manner:
Years 1–2 ....... 23% of cost
Years 3–8 ....... 9% of cost
What is the net present value of the equipment? Is it acceptable?
c. Recompute (a) and (b) assuming the tax rate is increased to 40 percent.

  • CreatedJune 03, 2014
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