Great Northern Fishing Company is contemplating the purchase of a new smoker. The smoker will cost $61,800 but will generate additional revenue of $34,000 per year for 6 years. Additional costs, other than depreciation, will equal $11,400 per year. The smoker has an expected life of 6 years, at which time it will have no residual value. Great Northern uses the straight-line method of depreciation for tax purposes. Determine the net present value of the investment if the required rate of return is 12 percent and the tax rate is 30 percent
articularsTimePVf@12%AmountPVCash Outflows – 1.00(61,800.00)(61,800.00)PV of Cash outflows(61,800.00)Cash inflows 1.00 0.8929 18,910.00 16,883.93Cash inflows 2.00 0.7972 18,910.00 15,074.94Cash inflows 3.00 0.7118 18,910.00 13,459.76Cash inflows 4.00 0.6355 18,910.00 12,017.65Cash inflows 5.00 0.5674 18,910.00 10,730.04Cash inflows 6.00 0.5066 18,910.00 9,580.39PV of Cash Inflows 77,746.71NPV 15,946.71Year 1.00 2.00 3.00 4.00 5.00 6.00Increase in Earnings 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00Increase in costs (11,400.00)(11,400.00)(11,400.00)(11,400.00)(11,400.00)(11,400.00)Less Inc in Depr (61800/6) (10,300.00)(10,300.00)(10,300.00)(10,300.00)(10,300.00)(10,300.00)Net Increase in Earnings 12,300.00 12,300.00 12,300.00 12,300.00 12,300.00 12,300.00Tax @.30 3,690.00 3,690.00 3,690.00 3,690.00 3,690.00 3,690.00Inc in Earnings after tax 8,610.00 8,610.00 8,610.00 8,610.00 8,610.00 8,610.00Add Depr 10,300.00 10,300.00 10,300.00 10,300.00 10,300.00 10,300.00Inc CFAT 18,910.00 18,910.00 18,910.00 18,910.00 18,910.00 18,910.00
