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Business
Accounting
Year 0 1 2 3 4 Pre-Tax Cash Inflows DDB Depreciation Expense 27,500 13,750 6,875 6,875 Taxable Income Income Taxes After-tax Net Cash Inflow Discount Factor Present Values Net present value (NPV) = $ 26,036 20,108 16,607 62,751

Year 0 1 2 3 4 Pre-Tax Cash Inflows DDB Depreciation Expense 27,500 13,750 6,875 6,875 Taxable Income Income Taxes After-tax Net Cash Inflow Discount Factor Present Values Net present value (NPV) = $ 26,036 20,108 16,607 62,751

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $61,500 per year. The firm’s cost of capital (discount rate) is 11%.

The firm is in the 30%  income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.

 

Year 0 1 2 3 4 Pre-Tax Cash Inflows DDB Depreciation Expense 27,500 13,750 6,875 6,875 Taxable Income Income Taxes After-tax Net Cash Inflow Discount Factor Present Values Net present value (NPV) = $ 26,036 20,108 16,607 62,751
Transcribed Image Text:Year 0 1 2 3 4 Pre-Tax Cash Inflows DDB Depreciation Expense 27,500 13,750 6,875 6,875 Taxable Income Income Taxes After-tax Net Cash Inflow Discount Factor Present Values Net present value (NPV) = $ 26,036 20,108 16,607 62,751
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