The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost $ 30,000 Years of useful life (economic life) 1 Tax rate 20% Required rate of return on equity 10% Required return on debt 5% Debt ratio 50% Annual revenues $ 145,000 Operating expenses (excluding depreciation) $ 100,000 What is the NPV of this investment?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.
The firm is contemplating the following:
Vehicle acquisition cost $ 30,000
Years of useful life (economic life) 1
Tax rate 20%
Required rate of
Required return on debt 5%
Debt ratio 50%
Annual revenues $ 145,000
Operating expenses (excluding
What is the
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