Your firm is considering investing in a new capital project that requires an initial investment of $800,000. This equipment will be depreciated by the straight-line over four years down to a value of zero. The machinery also has an operation life of four years. At the end of that life, you estimate it will have a salvage value of $120,000. Any gain or loss on the resell will be taxed at the firm's marginal tax rate. During the four-year life, the project should generate annual cash flows of $225,000 per year. The firm has a marginal tax rate of 22%, and it requires a return of 8.50% on projects of such risk. What is the Net Present Value of this project? [Present the answer rounded to the nearest dollar, e.g. 359462]
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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![Your firm is considering investing in a
new capital project that requires an
initial investment of $800,000. This
equipment will be depreciated by the
straight-line over four years down to a
value of zero. The machinery also has
an operation life of four years. At the
end of that life, you estimate it will
have a salvage value of $120,000. Any
gain or loss on the resell will be taxed
at the firm's marginal tax rate. During
the four-year life, the project should
generate annual cash flows of
$225,000 per year. The firm has a
marginal tax rate of 22%, and it
requires a return of 8.50% on projects
of such risk. What is the Net Present
Value of this project? [Present the
answer rounded to the nearest dollar,
e.g. 359462]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd0abf649-f696-4e7c-81e4-6f16a353fe5b%2Fd85b96b7-5b6a-41a3-b880-7deadb3e662c%2Fqyt2kui_processed.jpeg&w=3840&q=75)
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