The Atlantic Company plans to open a new branch office in a suburban area.The building will cost $200,000 and will be depreciated (on a straight-line basis) over a 20 year life to a $0 estimated salvage value.Equipment for the building will cost an additional $100,000.This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value.The branch office is expected to generate additional before tax net income of $30,000 per year.The tax rate is 40 percent and the cost of capital is 12 percent.Compute the net present value for the project.
A)-$63,523
B)+$246,477
C)+$53,523
D)-$53,523

Question

Quizplus · Accepted Answer

NPV = $300,000/20 = 15,000
$30,000 × .60 = 18,000
$33,000(PVIFA₀.₁₂,₂₀) - $300,000 = -$53,523

The Atlantic Company Plans to Open a New Branch Office