Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated net present value (NPV) of the proposed investment is (rounded to the nearest hundred dollars):
A) ($15,000).
B) ($12,300).
C) ($9,300).
D) ($6,000).
E) $1,800.

Question

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated net present value (NPV) of the proposed investment is (rounded to the nearest hundred dollars): 
A) ($15,000).
B) ($12,300).
C) ($9,300).
D) ($6,000).
E) $1,800.

Quizplus · Accepted Answer

To calculate the NPV, we first find the present value (PV) of each year's after-tax cash inflow using the given PV factors, then subtract the initial investment. The calculation is as follows:- Year 1: $18,000 * 0.962 = $17,316- Year 2: $15,000 * 0.925 = $13,875- Year 3: $9,000 * 0.889 = $8,001- Year 4: $6,000 * 0.855 = $5,130- Year 5: $3,000 * 0.822 = $2,466Total PV of cash inflows = $17,316 + $13,875 + $8,001 + $5,130 + $2,466 = $46,788NPV = Total PV of cash inflows - Initial investment = $46,788 - $45,000 = $1,788, rounded to the nearest hundred dollars is $1,800.

Brandon Company Is Contemplating the Purchase of a New Piece