The head of the corporate tax division of a major public relations firm has proposed investing...

 

Transcribed Image Text:

The head of the corporate tax division of a major public relations firm has proposed investing $320,000 in personal computers for the staff. The useful life and recovery period for the computers are both 5 years. The firm uses MACRS depreciation. There is no terminal salvage value. Labor savings of $135,000 per year (in year-zero dollars) are expected from the purchase. The income tax rate is 45%, and the after-tax required rate of return is 18%, which includes a 4% element attributable to inflation. E (Click the icon to view the present value factor table.) E (Click the icon to view the present value annuity factor table.) E (Click the icon to view the selected MACRS depreciation schedule.) Read the requirements. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. Begin by calculating the present value of the after-tax cash flows from labor savings. (Enter the present value factors to four decimal places, "X.XXXX." Round dollar amounts to the nearest whole number.) Data Table Present value of $1 Cash Total Present at 18% Inflow Value 3-Year 5-Year 7-Year 10-Year Present value of lump sum after-tax Tax Year Property Property Property Property cash flows from labor savings Requirements 1 33.33 % 20.00 % 14.29 % 10.00 % Year 1 44.45 32.00 24.49 18.00 Year 2 3 14.81 19.20 17.49 14.40 Year 3 1. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.04 x year 0 cash flow.) 2. Compute the NPV of the computers using the nominal required rate of return without adjusting the cash flows for inflation. 4 7.41 11.52 12.49 11.52 Year 4 11.52 8.93 9.22 Year 5 5.76 8.92 7.37 Present value of after-tax cash flows from labor saving 7 8.93 6.55 3. Compare your answers in numbers 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain. 8 4.46 6.55 Enter any number in the edit fields and then click Chec 9. 6.56 10 6.55 5 parts remaining Print Done 11 3.28 E11 40 (cimilor tol Data Table Data Table Fesent Value of Ordinary Annuity of $1 resent Value of $1 eriod 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 25% Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 25% .9709 .9615 .9524 .9434 .9346 .9259 .9091 .8929 .8772 .8621 .8475 .8333 .8000 1 .9709 .9615 .9524 .9434 .9346 .9259 .9091 .8929 .8772 .8621 .8475 .8333 .8000 2 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 1.5278 1.4400 2 .9426 .9246 .9070 .8900 .8734 .8573 .8264 .7972 .7695 .7432 .7182 .6944 .6400 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 1.9520 .9151 .8890 .8638 .8396 .8163 .7938 .7513 .7118 .6750 .6407.6086 .5787 .5120 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.1699 3.0373 2.9137 2.7982 2.6901 2.5887 2.3616 4 .8885 .8548 .8227 .7921 .7629 .7350 .6830 .6355 .5921 .5523 .5158 .4823 .4096 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331 3.2743 3.1272 2.9906 2.6893 .8626 .8219 .7835 .7473 .7130 .6806 .6209 .5674 5194 .4761 .4371 .4019 .3277 6. 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 2.9514 6. .8375 .7903 .7462 .7050 .6663 .6302 .5645 .5066 .4556 .4104 .3704 .3349 .2621 7 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 3.6046 3.1611 7 .8131 .7599 .7107 .6651 .6227 .5835 5132 .4523 .3996 .3538 .3139 .2791 .2097 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.3349 4.9676 4.6389 4.3436 4.0776 3.8372 3.3289 8 .7894 .7307 .6768 .6274 .5820 .5403 4665 .4039 .3506 .3050 .2660 .2326 .1678 9. 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.7590 5.3282 4.9464 4.6065 4.3030 4.0310 3.4631 9. .7664 .7026 .6446 .5919 .5439 .5002 4241 .3606 .3075 .2630 .2255 .1938 .1342 10 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 3.5705 10 .7441 .6756 .6139 .5584 .5083 .4632 .3855 .3220 .2697 .2267 .1911 .1615 .1074 12 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 6.8137 6.1944 5.6603 5.1971 4.7932 4.4392 3.7251 12 .7014 .6246 .5568 .4970 4440 .3971 3186 .2567 .2076 .1685 .1372 .1122 .0687 15 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 4.6755 3.8593 15 .6419 .5553 4810 .4173 .3624 .3152 .2394 .1827 .1401 .1079 .0835 .0649 .0352 18 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.2014 7.2497 6.4674 5.8178 5.2732 4.8122 3.9279 18 .5874 .4936 4155 .3503 .2959 .2502 .1799 .1300 .0946 .0691 .0508 .0376 .0180 20 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 8.5136 7.4694 6.6231 5.9288 5.3527 4.8696 3.9539 20 .5537 .4564 .3769 .3118 .2584 .2145 .1486 .1037 .0728 .0514 .0365 .0261 .0115 25 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 4.9476 3.9849 25 .4776 .3751 2953 .2330 .1842 .1460 .0923 .0588 .0378 .0245 .0160 .0105 .0038 Print Done Print Done Clear All Check Answer Vro mainIDG The head of the corporate tax division of a major public relations firm has proposed investing $320,000 in personal computers for the staff. The useful life and recovery period for the computers are both 5 years. The firm uses MACRS depreciation. There is no terminal salvage value. Labor savings of $135,000 per year (in year-zero dollars) are expected from the purchase. The income tax rate is 45%, and the after-tax required rate of return is 18%, which includes a 4% element attributable to inflation. E (Click the icon to view the present value factor table.) E (Click the icon to view the present value annuity factor table.) E (Click the icon to view the selected MACRS depreciation schedule.) Read the requirements. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. Begin by calculating the present value of the after-tax cash flows from labor savings. (Enter the present value factors to four decimal places, "X.XXXX." Round dollar amounts to the nearest whole number.) Data Table Present value of $1 Cash Total Present at 18% Inflow Value 3-Year 5-Year 7-Year 10-Year Present value of lump sum after-tax Tax Year Property Property Property Property cash flows from labor savings Requirements 1 33.33 % 20.00 % 14.29 % 10.00 % Year 1 44.45 32.00 24.49 18.00 Year 2 3 14.81 19.20 17.49 14.40 Year 3 1. Compute the NPV of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. (For example, year 1 cash flow = 1.04 x year 0 cash flow.) 2. Compute the NPV of the computers using the nominal required rate of return without adjusting the cash flows for inflation. 4 7.41 11.52 12.49 11.52 Year 4 11.52 8.93 9.22 Year 5 5.76 8.92 7.37 Present value of after-tax cash flows from labor saving 7 8.93 6.55 3. Compare your answers in numbers 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain. 8 4.46 6.55 Enter any number in the edit fields and then click Chec 9. 6.56 10 6.55 5 parts remaining Print Done 11 3.28 E11 40 (cimilor tol Data Table Data Table Fesent Value of Ordinary Annuity of $1 resent Value of $1 eriod 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 25% Period 3% 4% 5% 6% 7% 8% 10% 12% 14% 16% 18% 20% 25% .9709 .9615 .9524 .9434 .9346 .9259 .9091 .8929 .8772 .8621 .8475 .8333 .8000 1 .9709 .9615 .9524 .9434 .9346 .9259 .9091 .8929 .8772 .8621 .8475 .8333 .8000 2 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 1.5278 1.4400 2 .9426 .9246 .9070 .8900 .8734 .8573 .8264 .7972 .7695 .7432 .7182 .6944 .6400 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 1.9520 .9151 .8890 .8638 .8396 .8163 .7938 .7513 .7118 .6750 .6407.6086 .5787 .5120 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.1699 3.0373 2.9137 2.7982 2.6901 2.5887 2.3616 4 .8885 .8548 .8227 .7921 .7629 .7350 .6830 .6355 .5921 .5523 .5158 .4823 .4096 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331 3.2743 3.1272 2.9906 2.6893 .8626 .8219 .7835 .7473 .7130 .6806 .6209 .5674 5194 .4761 .4371 .4019 .3277 6. 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 2.9514 6. .8375 .7903 .7462 .7050 .6663 .6302 .5645 .5066 .4556 .4104 .3704 .3349 .2621 7 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 3.6046 3.1611 7 .8131 .7599 .7107 .6651 .6227 .5835 5132 .4523 .3996 .3538 .3139 .2791 .2097 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.3349 4.9676 4.6389 4.3436 4.0776 3.8372 3.3289 8 .7894 .7307 .6768 .6274 .5820 .5403 4665 .4039 .3506 .3050 .2660 .2326 .1678 9. 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.7590 5.3282 4.9464 4.6065 4.3030 4.0310 3.4631 9. .7664 .7026 .6446 .5919 .5439 .5002 4241 .3606 .3075 .2630 .2255 .1938 .1342 10 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 3.5705 10 .7441 .6756 .6139 .5584 .5083 .4632 .3855 .3220 .2697 .2267 .1911 .1615 .1074 12 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 6.8137 6.1944 5.6603 5.1971 4.7932 4.4392 3.7251 12 .7014 .6246 .5568 .4970 4440 .3971 3186 .2567 .2076 .1685 .1372 .1122 .0687 15 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 4.6755 3.8593 15 .6419 .5553 4810 .4173 .3624 .3152 .2394 .1827 .1401 .1079 .0835 .0649 .0352 18 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.2014 7.2497 6.4674 5.8178 5.2732 4.8122 3.9279 18 .5874 .4936 4155 .3503 .2959 .2502 .1799 .1300 .0946 .0691 .0508 .0376 .0180 20 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 8.5136 7.4694 6.6231 5.9288 5.3527 4.8696 3.9539 20 .5537 .4564 .3769 .3118 .2584 .2145 .1486 .1037 .0728 .0514 .0365 .0261 .0115 25 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 4.9476 3.9849 25 .4776 .3751 2953 .2330 .1842 .1460 .0923 .0588 .0378 .0245 .0160 .0105 .0038 Print Done Print Done Clear All Check Answer Vro mainIDG

Answer rating: 100% (QA)

a NPV of the computer with adjusted cash flows for inflation NPV PVCIFPVCOF initial investment 320000 Labor Saving135000 Inflation 1r n nnumber of years r inflation rate Inflation Year 1 1004 1 Year3 ... View the full answer