The Donald Company estimates that it can save $20,000 per year in annual operating cash costs for
Question:
The Donald Company estimates that it can save $20,000 per year in annual operating cash costs for the next 3 years if it buys a special-purpose machine at a cost of $46,000. Residual value is expected to be $6,000, although no residual value is being provided for in using MACRS depreciation (3-year recovery period) for tax purposes. The company will sell the equipment at the end of the third year. The required rate of return is 16%. Assume the income tax rate is 30%. Using the NPV method, show whether the investment is desirable.
Step by Step Answer:
See Exhibit 1158 on the following page There is a ne...View the full answer
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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