Connect Access Card For Managerial Accounting For Managers
5th Edition
ISBN: 9781260480771
Author: Eric Noreen, Peter C. Brewer Professor, Ray H Garrison
Publisher: McGraw-Hill Education
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Chapter 7C, Problem 7C.1E
To determine
Concept Introduction:
The
The net present value of the investment.
Expert Solution & Answer
Answer to Problem 7C.1E
The net present value of the investment is $145,511.
Explanation of Solution
The net present value of the investment is calculated as follows:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Initial investment (I) | $ (2,000,000) | |||||
| Net operating income (A) | $ 300,000 | $ 300,000 | $ 300,000 | $ 300,000 | $ 300,000 | |
| Income tax (B) = (A*30%) | $ 90,000 | $ 90,000 | $ 90,000 | $ 90,000 | $ 90,000 | |
| Income after tax (C) = (A-B) | $ 210,000 | $ 210,000 | $ 210,000 | $ 210,000 | $ 210,000 | |
| $ 400,000 | $ 400,000 | $ 400,000 | $ 400,000 | $ 400,000 | ||
| Cash inflows after tax (E) = (C+D) | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | |
| Net | $ (2,000,000) | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 |
| PV of $ 1(13%) (G) | 1.00000 | 0.88496 | 0.78315 | 0.69305 | 0.61332 | 0.54276 |
| PV = F*G | $ (2,000,000) | $ 539,823 | $ 477,719 | $ 422,761 | $ 374,124 | $ 331,084 |
| Net present value (Sum of PVs) | $ 145,511 |
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Chapter 7C Solutions
Connect Access Card For Managerial Accounting For Managers
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