Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in the third year of an equipment selection investment project: The total after-tax present value of the cash flows is closest to:

Question

Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in the third year of an equipment selection investment project:  The total after-tax present value of the cash flows is closest to:

Quizplus · Accepted Answer

To calculate the after-tax present value of the cash flows, we need to first calculate the after-tax cash flows for each year.

For year 3:
Revenue = $60,000
Less: Expenses = $20,000
Less: Depreciation = $25,000/5 =$5,000
Pre-tax income = $35,000
Taxes (30%) = $10,500
After-tax cash flow = $24,500

Next, we discount this cash flow back to present value using the discount rate of 12%:
PV = $24,500 / (1+0.12)^3
PV = $17,774

Thus, the total after-tax present value of the cash flows is the sum of the present values of each year's after-tax cash flow:
Total PV = $17,774 + $29,461 + $13,000
Total PV = $60,235
Therefore, the best choice is C.

Ring Corporation Uses a Discount Rate of 12% and Has