Lastlock Security Systems is considering an investment in computer-based production technology as part of a business reengineering

Question:

Lastlock Security Systems is considering an investment in computer-based production technology as part of a business reengineering process. The necessary equipment, installation, and training will cost $18,000,000, have a life of 8 years, and generate annual net before-tax cash flows of $3,100,000 from operations. The technology will have no salvage value at the end of its 8-year estimated life. The company's tax rate is 30 percent, and its cost of capital is 5 percent.

a. If Lastlock 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 project? Is it acceptable?

c. Recompute (a) and (b) assuming the tax rate is increased to 40 percent.

Net Present Value
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Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...