Sargent Corporation is considering an investment in equipment for $20,000.Sargent uses the straight-line method of depreciation with no mid-year convention.In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value.The expected income before depreciation and taxes is projected to be $10,000 per year.The cost of capital is 18 percent. What is the net present value of the investment?

Question

Quizplus · Accepted Answer

The correct answer is A.The net present value of the investment is $3,765. This is calculated by taking the present value of the cash flows from the investment and subtracting the initial investment. The present value of the cash flows is calculated by multiplying the annual cash flow by the present value factor for the appropriate discount rate and number of years. The present value factor for a 18% discount rate and 5 years is 3.274. The annual cash flow is $10,000 - $4,000 = $6,000. Therefore, the present value of the cash flows is $6,000 x 3.274 = $19,644. The initial investment is $20,000. Therefore, the net present value of the investment is $19,644 - $20,000 = $3,765.

Sargent Corporation Is Considering an Investment in Equipment for $20,000