The manager of company A is thinking about adding an air conditioner to theoffice. The AC will cost $1630 to buy and install. The manager plans to usethe AC for 5 years and each year's depreciation rate is 18% of the purchaseprice. The manager expects to sell the AC in 5 years for $880.The tax rate is15% and the company's WACC is 15%. If the manager considers thispurchase of AC as an investment, what is the NPV (keep two decimal placesand assume that the AC will not affect the operations of the company)?

The annual depreciation expense is calculated as the purchase price multiplied by the depreciation…

Answered: The manager of company A is thinking…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
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