Antonio Melton, the chief executive officer of Solomon Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $418,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $86,000 Year 2 $97,000 Year 3 $122,000 Year 4 $186,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $83,600 per year for the four-year period. The company's income tax rate is 30 percent per year. Use this information to revise the company's expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the project? Note: For all requirements, Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answers to the nearest whole dollar. a. Net present value a. Should Mr. Melton approve the project? b.&c. Net present value b.&c. Should Mr. Melton approve the project?
Antonio Melton, the chief executive officer of Solomon Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $418,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax. Year 1 $86,000 Year 2 $97,000 Year 3 $122,000 Year 4 $186,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $83,600 per year for the four-year period. The company's income tax rate is 30 percent per year. Use this information to revise the company's expected cash flow from this project. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the project? Note: For all requirements, Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answers to the nearest whole dollar. a. Net present value a. Should Mr. Melton approve the project? b.&c. Net present value b.&c. Should Mr. Melton approve the project?
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 13P
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Transcribed Image Text:Antonio Melton, the chief executive officer of Solomon Corporation, has assembled his top advisers to evaluate
an investment opportunity. The advisers expect the company to pay $418,000 cash at the beginning of the
investment and the cash inflow for each of the following four years to be the following. Note that the annual
cash inflows below are net of tax.
Year 1
$86,000
Year 2
$97,000
Year 3
$122,000
Year 4
$186,000
Mr. Melton agrees with his advisers that the company should use a desired rate of return of 10 percent to
compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
Required
a. Compute the net present value of the proposed project. Should Mr. Melton approve the project?
b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers
failed to consider that the depreciation on equipment used in this project will be tax deductible. The
depreciation is expected to be $83,600 per year for the four-year period. The company's income tax rate is 30
percent per year. Use this information to revise the company's expected cash flow from this project. Compute
the net present value of the project based on the revised cash flow forecast. Should Mr. Melton approve the
project?
Note: For all requirements, Negative amount should be indicated by a minus sign. Round your intermediate
calculations and final answers to the nearest whole dollar.
a. Net present value
a. Should Mr. Melton approve the project?
b.&c. Net present value
b.&c. Should Mr. Melton approve the project?
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