TB MC Qu. 12-82 (Algo) Estimated net present value (NPV) of the proposed investment: Plant Company

Plant Company is contemplating the purchase of a new piece of equipment for $37,000. Plant is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $20,000, $10,000, $6,000, $6,000 and $2,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated net present value (NPV) of the proposed investment is (rounded to the nearest hundred dollars):

Multiple Choice

• ($13,200).

• ($10,500).

• ($7,500).

• ($4,200).

• $3,600.