eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $39,000 to purchase and install and $26,000 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 $46,000 per year. The firm's cost of capital (discount rate) is 7%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 24% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 24% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 x 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $39,000 to purchase and install and $26,000 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 $46,000 per year. The firm's cost of capital (discount rate) is 7%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 24% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 24% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 x 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system
costs $39,000 to purchase and install and $26,000 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 $46,000 per year. The firm's cost of capital
(discount rate) is 7%.
Required:
1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the
appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.)
la. The firm is not yet profitable and therefore pays no income taxes.
1b. The firm is in the 24% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules
do not apply.
1c. The firm is in the 24% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a
four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of
the asset at the start of the year.
2. What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR
builit-in function in Excel to compute the IRR.
Complete this question by entering your answers in the tabs below.
Req 1A
Req 1B
Req 1C
Req 2
The firm is not yet profitable and therefore pays no income taxes. (Round your answer to nearest whole dollar amount.)
Net present value
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