Great Northern Fishing Company is contemplating the purchase of a new smoker. The smoker will cost $60,000
Question:
Great Northern Fishing Company is contemplating the purchase of a new smoker. The smoker will cost $60,000 but will generate additional revenue of $34,000 per year for six years. Additional costs, other than depreciation, will equal $12,000 per year. The smoker has an expected life of six years, at which time it will have no residual value. Great Northern uses the straight-line method of depreciation for tax purposes. Determine the net present value of the investment if the required rate of return is 14 percent and the tax rate is 20 percent. Should Great Northern make the investment in the smoker?
Step by Step Answer:
The annual cash inflow is 19600 calculated as follows Revenue 34000 Less Co...View the full answer
Related Video
In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue
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