How do I create an After tax Cash Flow Analysis? Use rounded answers for subsequent calculations
Transcribed Image Text:Net Present Value Analysis
Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $64,000. Champion
estimates the contract will provide annual net cash inflows (before taxes) of $26,000. For tax purposes, the equipment will be depreciated as follows:
Year 1 $8.000
Year 2 16,000
Year 3 16.000
Year 4 16.000
Year 5 8.000
Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $8,000 after five years.
Assuming a 35% income tax rate and a 10% hurdle rate, compute the net present value of this contract proposal. Using net present value analysis, should Champion accept the contract?
Round answers to the nearest whole number. Use rounded answers for subsequent calculations.
Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers.
After-Tax Cash Flow Analysis
Amount Present Value
After-tax cash inflows for S years
Tax savings from depreciation
Year 1
Year 2
Year 3
Year 4
Year 5
After-tax equipment sale proceeds
Total present value of future ash flows
Investment required in equipment
Net positive (negative) present value
Should Champion accept the contract?
Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).
Expert Solution
Step 1
Net present value is the difference between present value of cash inflows and present value of cash outflows from the business. A positive NPV indicates that project should be accepted, otherwise not.
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