Lisa Black, president of the Liverpool Product Design Group, is considering an investment in computer-aided design equipment.
Question:
Lisa Black, president of the Liverpool Product Design Group, is considering an investment in computer-aided design equipment. The equipment will cost $120,000 and will have a six-year useful economic life.
method and zero terminal disposal value.
For tax purposes, this equipment will be depreciated using the straigh-line
She estimates that the equipment will generate
annual cash operating cost savings of $20.000 (before income taxes).
The $20,000 is
measured at current prices and will be received at the end of each year.
Assume:
- After-tax real discount rate = 5%
- Income tax rate = 30%
- Annual inflation rate = 20%
(1) Compute the nominal discount rate
(2) Compute the present value of the after-tax cash operating cost savings for each year over the 6-year period.
(3) Compute the present value of the depreciation tax savings with this new equipment.
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook