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A firm is considering the following two competing proposals for the purchase of new equipment. Assume straight-line...

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Finance

A firm is considering the following two competingproposals for the purchase of new equipment.

Assume straight-line depreciation and a tax rate of 20percent.

(a) Calculate the net present value of each alternativeat a discount rate of 10 percent.

(b) If 10 percent is the required rate of return, whichalternative should be selected? Why?

Please show all steps. Don't round off until you get to theend.

A

B

Net Cash Outlay

9000

7500

Salvage Value

0

0

Estimated Life

5 years

5 years

Net Cash Savings before Depreciation and Taxes

Year 1-3

3000

2000

Year 4-5

2500

2000

Answer & Explanation Solved by verified expert
3.7 Ratings (408 Votes)
a NPV of Proposal A 940998 941 NPV of Proposal B 297505 298 b As proposal A has the positive NPV hence alternative A should be selected Proposal A Cost of equipment 9000 Salvage Value 0 Estimated Life 5 years Depreciation 90005year 1800 Sl No Year 0 1 2 3 4 5 a Net Cash Outlay 9000 b Net Cash Savings before Depreciation and    See Answer
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Transcribed Image Text

A firm is considering the following two competingproposals for the purchase of new equipment.Assume straight-line depreciation and a tax rate of 20percent.(a) Calculate the net present value of each alternativeat a discount rate of 10 percent.(b) If 10 percent is the required rate of return, whichalternative should be selected? Why?Please show all steps. Don't round off until you get to theend.ABNet Cash Outlay90007500Salvage Value00Estimated Life5 years5 yearsNet Cash Savings before Depreciation and TaxesYear 1-330002000Year 4-525002000

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