After-Tax Net Present Value and IRR (Non-MACRS Rules—Straight-Line vs. DoubleDeclining-Balance Depreciation Methods) eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4years. Management expects the new system to reduce the cost of managing inventories by $62,000per year. The firm’s cost of capital (discount rate) is 10%.Required1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? Use the NPV built-in function in Excel; round answers to the nearest whole dollar. a. The firm is not yet profitable and therefore pays no income taxes. b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvagevalue. Assume MACRS rules do not apply; calculate depreciation expense using the SLN functionin Excel.
After-Tax
to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4
years. Management expects the new system to reduce the cost of managing inventories by $62,000
per year. The firm’s cost of capital (discount rate) is 10%.
Required
1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? Use the NPV built-in function in Excel; round answers to the nearest whole dollar.
a. The firm is not yet profitable and therefore pays no income taxes.
b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage
value. Assume MACRS rules do not apply; calculate depreciation expense using the SLN function
in Excel.
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